Market Mechanis Flashcards
What is externalities
Are the costs and benefits of production or consumption experienced by society not by producers and consumers
Explain externalities in simple terms
Third party costs and benefits
What does the price mechanism do
Determines the market price.The invisible hand of market.
How is resources allocated in the free market
Through the price mechanism.The economic problem of scarce resources is solved through this.
What is the four main functions used to allocate resources
Rationing
Signalling
Incentive
Allocative
Explain prices signal information
The prices provides information that allows buyers and sellers in a market to plan and coordinate their economic activities
How does price create incentive
A higher price in a market creates incentives for producers to supply more of a good or service because they believe that larger profits can be made
Explain the rationing function of prices
When there are scarce resources price increases due to the excess of demand.The increase in price discourages demand and rations demand for good.
Explain allocative function of prices
Directs resources between markets away from the markets in which prices are too high and in which there is excess supply towards the market where there is excess demand and prices is too low
what are the two types of market failure
-Total market failure
-Partial market failure
What is market failure
An inefficient allocation of goods and services in a free market
What are the types of demerit goods
too much is produced/consumed
What are the types of merit goods
Too little is produced/consumed
When in a diagram does extral costs of production occur
Where marginal private costs(MPC)<Marginal social costs(MSC)
-(MPC<MSC)
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