Micro YR 1 - Interrelated markets and market failure Flashcards
Joint demand?
Demand for Complimentry goods.
Composite demand?
A good is demanded for multiple separate uses
E.g. milk for cheese and cream
Outward shift in demand of of one = inward shift of supply of others
Derived demand?
Demand for a factor of production used to produce a good
Joint supply?
Supply of one good increases the supply of a by-product e.g. Cow and leather, Chicken and eggs
Competitive demand?
Demand for substitute goods
You can derive equal satisfaction from either product
Market failure?
When the price mechanism leads to a misallocation of resources and inefficiency
Causes of market failure?
Externalities (POS / NEG)
Public goods
Information gaps
Positive externality?
When a benefits affecting third parties outside the price mechanism
Negative externality?
When a cost affecting third parties outside the price mechanism
Social costs?
Private costs + external costs
Social Benefits?
Private Benefits + external Benefits
How do we further classify externalities?
Production or consumption
How to counter negative externalities?
Set up a minimum price for goods
Increase indirect tax
Tradeable pollution permits
Regulation
Define regulation
When the govt makes changes to the law to counter market failure
How to fix Positive positive consumption externality?
Set a max price below equilibrium
How to fix Positive positive production externality?
Subsidies
Subsidy?
A grant from the govt to a firm to increase supply and extend Qd
Value of per unit subsidy from a graph?
The vertical distance between the supply curves shows the value of the subsidy per unit.
Total cost of subsidy from graph?
Rectangle with a height equal to the per-unit subsidy and a width equal to the equilibrium quantity
How does a subsidy counter a PPE
Increases and shifts supply
