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Microeconomics > Market Mechanism > Flashcards

Market Mechanism Flashcards

1
Q

What is a perfectly competitive market?

A 
Many buyers and sellers
Sellers are price takers
Perfect knowledge
Free entry to and exit from market
Homogeneous goods
Firms are short run profit maximisers
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2
Q

In a perfectly competitive market how do firms determine price?

A

Supply and demand

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3
Q

What might firms also aim to do other than compete on price?

A

Improve prouducts - innovating, quality
Reduce costs - less competition (new firms)
Improve the quality of the service y

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4
Q

What two things makes something a public good?

A

Non excludability

Non rivalry

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5
Q

What is non rivalry?

A

Consumption of a public hood by one person does not reduce the amount avalible of a good to everyone

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6
Q

What is non excludability?

A

The benefits derived from the provision of pure public goods can’t be confined to only those who have actually paid for them

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7
Q

What gives rise to the free rider problem?

A

Non excludability of public goods

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8
Q

What is the free rider problem?

A

Consumers have no willingness to pay as they can enjoy the benefits without paying
This means there is no effective demand for the good
No incentive for firms to produce it
ABSOLUTE MARKET FAILURE

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9
Q

Why would governments provide a public good?

A

The opportunity cost is outdated by the expected benefit of doing so

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10
Q

What are private goods?

A

Goods that we buy and consume

Consumption of these goods generates utility

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11
Q

Define externality?

A

Effect on a third party from the consumption or production of a good or service

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12
Q

Why do externalities cause market failure?

A

As the price of the food does not accurately reflect the costs of production or the benefit of consumption

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13
Q

Examples of positive externality in consumption?

A

Perfume

Immunisations

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14
Q

Examples of positive externality in production?

A

Visual benefit of farm cultivation or building

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15
Q

Examples of negative externality in consumption?

A

Passive smoking

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16
Q

Examples of begative externality in production?

A

Pollution

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17
Q

What arises from consumption?

A

Benefit

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18
Q

What arises from production?

A

Cost

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19
Q

What is the social cost of production?

A

Included the cost borne by the producer (private cost) and any effect on third parties

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20
Q

When does a market failure occur?

A

Whenever a market leads to misallovation of resources
When resources are not allocated to the best interests of society
More output in the form of goods and services if he resources were used in a different way

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21
Q

Types of market failure?

A 
Externalities
Underprovisioon of public goods
Information gaps
Monopolies
Inequalities in the distribution of income and wealth
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22
Q

Describe how the under provision of public goods can lead to market failures?

A

Public goods are non excludable and non rival

They are underprovidrd in a free market because of the free rider problem

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23
Q

Describe how externalities lead to market failure?

A

The cost or benefit a third party revives from an economic transaction outside of the market mechanism
The spill over effect of the production or consumption of a good or service

Positive - merit goods
Negative - demerit goods

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24
Q

Describe how information gaps lead to market failure?

A

Consumers and producers have perfect information when making economic decisions

This imperfect information leads to a misallocation of resources

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25
Q

Describe how monopolies lead to market failure?

A

Since the consumer has very little choice
Where to buy the goods and services offered by a monopoly, they are often overcharged
Leading to the underconsumption of the good or service
There is a misallocation of resources since consumer needs and wants are not fully met

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26
Q

Describe how inequalities in the distribution of income and wealth can lead to market failure?

A

Inequitable distribution in income and wealth
Income refers to the flow of money
Wealth refers to a stock of assets

Negative extermslities such as social unrest

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27
Q

What is partial market failure?

A

Occurs when the market produces a good but is the wrong quantity or the wrong price
Resources are misallocation where there is partial market failure

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28
Q

Why are public goods underprovidrd by the private sector?

A

They do not make a profit from providing the good since consumers do not see a reason to pay for tbf good
If they still receive the benefit without paying

It is difficult to measure the value consumers get from public goods, so it is hard to put a price on the good
Consumers undervalue the benefit
Producers overvalue so they can charge more

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29
Q

Why do governments provide public goods?

A

They have to estimate what the social benefit of the public good is when deciding what output of the good to provide
They are funded using tax revenue but the quantity provided will be less than the socially optimum quantity

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30
Q

What are quasi public goods?

A

Both public and private goods
Semi excludable
Semi non rival
Partially provided by the free market

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31
Q

When do externalities exist?

A

When there is a divergence between private and social costs and benefits

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32
Q

Describe demerit goods?

A

Information failure
Long run implications
Overprovided

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33
Q

Descrive merit goods?

A

Long run benefits
Underprovidrd in a free market
Information failure

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34
Q

What are merit goods?

A

Merit goods are goods which will be underconsumed if left to party market forces

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35
Q

Why do merit goods happen?

A

INFORMATION FAILURE
The failure to take into account future benefits
A lack of knowledge about future benefits
POSITIVE EXTERNALITIES
A benefit to a third party (not the producer or consumer) of the consumption of the goods

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36
Q

What does symmetric information mean?

A

Means that consumers and producers have percect information to make their decision
Efficient allocation of resources

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37
Q

What is asymmetric information?

A

Unequal knowledge between consumers and produces

Leads to market failure

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38
Q

What is Imperfect information?

A

Where information is missing so an informed decision cannot be made

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39
Q

How could information be made more available?

A

More widely avalible through advertising or government intervention

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40
Q

How can governments intervene?

A 
Indirect taxes
Subsidies 
Maximum and minimum prices 
Traceable pollution permits 
State provision of public goods 
Provision of information
Regulation
41
Q

Describe how governments can intervene through indirect taxes?

A

Taxes on expenditure
They increase production costs for producers so producers supply less
This increases market price and demand contracts
They could be used to discourage the production or consumption of a demerit good or service

42
Q

What is a subsidy?

A

A payment from the government to a producer to lower their costs of production and encourage them to produce more

43
Q

How do government subsidies work?

A

Encourage the merit goods
Includes the full social benefit in the market price of the good
The external benefit is internalise

44
Q

What are the disadvantages of subsidies?

A

Opportunity cost to the government
Potential higher taxes
Potential for firms to become inefficient if reliant on subsidy

45
Q

How do indirect taxes work?

A

Reduce the quantity of demerit goods consumed
By increasing price of good
Interbnalizes the externality

46
Q

Why might a government set a maximum price?

A

The consumption or production of a good is to be encouraged

This is so the good does not become too expensive to produce or consume

47
Q

When deciding on a maximum price what should be considered?

A

Free market price
SET BELOW
otherwise it would be ineffective

48
Q

Disadvantages with maximum prices?

A

Reduce firms profits
Less investment long run
Firms might raise price of other goods - no net gain

Could lead to gov failure if they misjudge where optimum market price should be

49
Q

Advantages of maximum prices?

A

Prevent monopolies exploiting customers
Control market price
Welfare gain for consumers by keeping prices low
Increase efficiency in firms since they have an incentive to keep their costs low to maintain their profit level

50
Q

Why would a government introduce a minimum price?

A

Where the consumption or production of a good is to be discouraged
This ensures the good never falls below a certain price
Reduce the negative externality from consuming a demerit good

51
Q

What should be considered when setting the minimum prices?

A

Have to be set above the free market price

Otherwise they would be ineffective

52
Q

Why introduce a traceable pollution permits?

A

Limits the amount of negative externalities in the form of pollution created in industries
Firms will r allowed to pollute up to a certain amount any surplus on their permit can be treated
Firms can buy and sell between themselves

53
Q

Advantages of traceable pollution permits?

A

Benefit the environment long run by encouraging firms to use green production methods
Government could raise revenue from the permits because they can sell them to firms - revenue reinvested in green technology
If firms exceed their permit, they will have to purchase more permits from firms which did not use their whole permit - raises revenue for greener firms who might then invest in green production methods

54
Q

Disadvantages of traceable pollution permits?

A

It could lead to some firms relocating to where they can pollute without limits which will reduce their production costs
Firms might pass the higher costs of production on to the consumer
Competition could be testrixted in the market if the permits create a barrier to entry
Could be expensive for governments to monitor

55
Q

Why would governments provide information to prevent market failure?

A

Governments can ensure there is no information failure, so consumers and firms can make informed economic decisions
Expensive to police

56
Q

Why do governments intervene and provide public goods?

A

They can provide goods that are underprovidrd in the free market such as education and healthcare
These have external benefits
This makes merit goods more accessible which might increase their consumption and yield positive externalities
Could be expensive for governments to provide education and the government will incur an opportunity cost of spending their revenue

57
Q

Why do governments regulate to prevent market failure?

A

Government could use laws to ban consumers from consuming a good
They could make it illegal
Positive externalities

Firms who don’t follow fregualtiom face heavy fines which act as a disincentive to break the rule
Could raise the cost of firms who might pass on the higher costs to consumers

58
Q

What happens when governments fail?

A

They could worsen the market failure already present or a new failure might occur
Bet welfare loss to society
The loss could be ineffective intervention or when harm is caused

59
Q

What are the causes of government failure?

A

Distortion of price signals
Unintended consequences
Excessive administrative costs
Information gaps

60
Q

How does the distortion of price signals cause government failure?

A

Government subsidies could distort price signals by distorting the free market mechanism
A free market economicst would argue that this lead to government failure
There could be an inefficient allocation of resources because the market mechanism is not able to act freely

61
Q

How do information gaps cause government failure?

A

Some policies might be decided without perfect information
This might require a full cost benefit analysis and it could be time consuming and expensive

However it is impractical for governments to gain every bit of information they need so assumptions are made

62
Q

Why do de merit goods happen?

A

Negative externalities

Information failure - failure to take into account negative consequences, lack of knowledges about future negative consequences

63
Q

Examples of demerit goods?

A

Cigarettes
Drugs
Alcohol

64
Q

Why do merit goods happen?

A

Information failure
- failure to take into account future benefits or a lack of knowledge about future benefits
Positive externalities

65
Q

Examples of merit goods?

A 
Preventative treatments
Insurance
Education
Healthy eating 
Defence spending
66
Q

what is a market structure?

A

the organisation of a market in terms of the number of firms in the market and the ways in which they behave

67
Q

what is perfect competition?

A

a market which displays:

large numbers of buyers and sellers
the ability to buy or sell as much as is desired at the ruling market prices
the inability of an individual buyer or seller to influence the market price
a uniform product
no long run barriers to entry or exit

68
Q

what is a concentrated market?

A

a market contained very few forms in the extreme only one firm

69
Q

what is price maker and price taker?

A

price taker - a firm that passively accepts the ruling market price set by the market conditions outside its control

price marker - a firm possessing the power to set the price within the market

70
Q

what is the concentration ratio?

A

indicates the total market share of a number of leading firms in a market, or the output of those firms as a percentage of total market output

71
Q

what is the main objective of firms?

A

profit maximisation

when a firms sales revenue is furthest above total cost of production

72
Q

pure public good?

A

it is impossible to exclude free riders
eg defence and police
complete absence of a market

73
Q

what are minimum prices generally associated with?

A

demerit goods

74
Q

what are maximum prices generally associated with?

A

merit goods

75
Q

what happens if a maximum proves is set above the equilibrium price?

A

it will have no effect

76
Q

what will happen if a maximum price is set below the equilibrium price?

A

SHORTAGE

demand is greater than supply

77
Q

why are maximum prices imposed?

A 
essential good (some may be unable to afford)
monopoly exploration (reduces monopoly price closer to competitive market price)
78
Q

what does a price ceiling lead to?

A

shortage

79
Q

what does a price floor lead to?

A

surplus

80
Q

when is the only time a price ceiling would have an effect on the market?

A

below equilibrium price

81
Q

what will happen if a minimum price is below equilibrium?

A

it will have no effect

82
Q

where does a price ceiling go to be effective?

A

below equilibrium price

83
Q

where does a price floor go to be effective?

A

above equilibrium price

84
Q

what are costs to do with?

A

producers

85
Q

what are benefits to do with?

A

consumers

86
Q

why are merit goods uber provided in the free market?

A

social benefits exceed private benefits

87
Q

why is there underconsumption of merit goods

A

people consuming merit goods ignore or downplay information about the long term private benefits that result from consumption

88
Q

why is there overconsumption of demerit goods

A

people consuming demerit goods ignore or downplay information about the long term private costs that result from consumption

89
Q

sources of government failure

A

immobility of labour
monopolies
information failure

90
Q

if a government subsidies a product, when will the largest increase in sales occur?

A

demand is price elastic

supply curve is shifted right

consumer expenditure than increases if the demand curve is price elastic

91
Q

why are merit goods likely to be underprovided in a free market economy

A

positive externalities are generated when merit goods are consumed

the social benefit enjoyed by the whole population exceeds the private benefit enjoyed by individual consumers

92
Q

what is market failure

A

free market failed to allocate resources at the socially optimum level

leading to a net loss in social welfare

93
Q

evaluation points for indirect tax

A

demand is inelastic so adverse consumer welfare
regressive - lower incomes suffer more
rise in black market activity particularly if severe tax
difficult to know if government sets the right tax

94
Q

evaluation points for subsidies

A

expensive - opportunity cost for government best been allocated elsewhere

not all is passed on to consumer

elasticity of demand

inefficient firms not best targeted as firm is wasteful

95
Q

when the state provides something what is supply

A

perfectly inelastic

96
Q

evaluation of state provision of goods or services

A

oppertunity cost (money best been used elsewhere e.g. defence)

state run organisation tends to be wasteful (no profit motive so inefficiency occurs)

ignores private sector (useful in bringing down costs and improving quality and innovating)

97
Q

what does a maximum price lead to

A

excess demand

98
Q

what does a minimum price lead to

A

excess supply

99
Q

short run vs long run indirect tax evaluation

A

short run ineffective with inelastic demand

long run this tax generates revenue

this revenue can be used to subsidise alternatives or provide information

making demand more price elastic

Microeconomics (5 decks)

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