Micro 1.2 Flashcards
Define: Free Market Mechanism
The system bu which the market forces of supply and demand determine and the decisions made by consumers and firms
Define: Allocative efficiency
When society is producing an appropriate bundle of goods relative to consumer preferences
Define: Productive efficiency
Using resources ‘fully’ such that the average cost of production is at its lowest point
Define: Economic efficiency
Occurs when both allocative and productive efficiency are achieved
Where on the diagram is allocative efficiency
Where marginal cost = Marginal benefit
Define: Private costs
The costs incurred by those taking a particular action
Define: Third party
Those not directly involved in a decision
Define: External costs
The costs imposed upon third parties as a consequence of decisions made by producers or consumers. The external cost is therefore not reflected in the market price
Social costs =
Social costs = Private costs + external costs
Allocatively efficient level of output is described as _____
SOLO
Evaluation for externalities
- Magnitude
- Measurement difficulty
- Potential benefits
- Time lag
- Impact on different groups
Define: Positive externality
A benefit that would be enjoyed by a third-party but is under-consumed
Causes of information failure
- Asymmetric information
- Complex information
- Addiction
- Inaccurate information
Public goods are both
Non-rival and non-excludable
What does non-rival mean
Consumption by one person does not reduce availability for a good to others
