Markets & Market Failure - Year 1 Microeconomics Flashcards
term
definition
What are the advantages to information provision?
• Helps consumers act more rationally, causing market to work in favour society• Improved decision-making in markets• Can incentivise firms to produce, stimulating growth• Public health and safety (ie. effects of smoking)• Empowerment of consumers as there is less information asymmetry between parties
What are the three major assumptions made in all (free-market) economic models?
- Rational Decision-Making by Consumers: Assumes that consumers make choices that maximise their utility or satisfaction.2. Rational Decision-Making by Producers: Assumes that producers aim to maximise their profits.3. Rational Decision-Making by Government: Assumes that the govenment seeks to maximise social welfare.
Define opportunity cost.
Opportunity cost refers to the value of the next best alternative forgone when a choice is made.
Why may consumers not behave rationally?
Consumers may not behave rationally due to factors like limited information, cognitive biases, emotional influences, time constraints, social pressures, and individual preferences
What are the four functions of money?
• Medium of Exchange: Money serves as a widely accepted means of payment, facilitating transactions by acting as a medium for exchanging goods and services.• Measure of Value: Money provides a standardized measure of the worth or value of goods, services, and assets, allowing for comparisons and pricing.• Store of Value: Money allows individuals to store and preserve wealth over time, maintaining its value for future use and preventing loss of purchasing power.• Standard of Deferred Payment: Money serves as a reference point for settling debts and fulfilling financial obligations at a later time, establishing a standard for credit transactions and contractual agreements.
Why is there a positive association between price and quantity supplied?
The law of supply states that higher prices encourage production, leading to a higher quantity supplied, while lower prices disincentivize production, resulting in a lower quantity supplied.
Define price elasticity of supply.
Price elasticity of supply is defined as the responsivess of quantity supplied following a change in price.PED = (Δ%Qs)/(Δ%P)
Why is supply price inelastic in the short run?
Supply price is inelastic in the short run due to limited production capacity and constraints in adjusting inputs promptly.
Provide an example of a good with a relatively elastic supply, and a good with a relatively inelastic supply.
• Elastic: Sports car• Inelastic: Housing in UK
Two goods have a positive cross elasticity of demand, this means that they are…
Substitutes - a rise in price of good A leads to an increase in demand for good B)
Explain the difference between partial and complete market failure.
Partial market failure occurs when the forces of supply and demand fail to efficicently allocate resources, while complete market failure refers to the total absence of goods or services provision by markets.
Define social costs and benefits (MSC / MSB)
Social costs (MSC) refer to the total expenses or negative consequences borne by society as a whole due to an economic activity, including both private costs and external costs. MSC = MPC + MEC.Social benefits (MSB) are the overall advantages or positive outcomes received by society as a whole from an economic activity. MSB = MPB + MEB.
What does it mean to internalise an externality?
To ensure that the costs or benefits associated with an economic activity are accounted for by the parties involved in the transaction, rather than being externalized towards society.
Define demerit good with an example.
Demerit goods are goods or services that provide negative externalities of consumption (external costs to society, leading to social welfare loss), and are typically overprovided by the market, such as alcohol, which can lead to health issues, addiction, and social problems.
What is meant by the ‘free rider problem’?
Where individuals benefit from a public good without contributing to its production or funding, taking advantage of the fact that the consumption of the good cannot be restricted.
Why do ad valorem supply curves diverge from the original supply curve?
Tax imposed as a percentage of the product’s price increases the cost of production for suppliers, leading to a higher price required for suppliers to be willing to produce the same quantity, resulting in a diverging shift of the supply curve.
Explain the concept of tradable pollution permits.
Tradable pollution permits are market-based instruments that set a limit on pollution and allow entities to buy, sell, or trade permits, incentivising pollution reduction and the efficient allocation of emissions.
What are the disadvantages to state provision of public goods?
• Free-rider problem• Potential inefficiencies may arise as there is a lack of innovation and competition• Risk of monopoly power
Define government failure.
When the costs of government intervention outweigh the benefits intended by the action, can lead to a misallocation of scarce resources.
Define normative statement.
Subjective statements that contain value judgement, and can not be tested by empirical means.Eg. The government should increase minimum wage to improve the standard of living.
Define value judgement.
This type of judgement cannot be tested. This judgement is based off that person’s opinion or values.
Define positive statement.
Objective statements that can be tested by emprical means.Eg. The current unemployment rate is 5%
Explain what is meant by the ‘basic economic problem’.
The basic economic problem states that there are infinite wants in society, but only a small and finite amount of scarce resources are available to satisfy those wants.