Microeconomics - 1.3.1

Question 1

What is Market Failure?

Answer 1

When the price mechanism leads to an inefficient allocation of resources leading to a net welfare loss

Question 2

When does Market Failure occur?

Answer 2

When free markets make an inefficient use of scarce resources to help satisfy changing wants & needs

Question 3

What is efficiency in Market Failure?

Answer 3

Efficiently is about a society making optimal use of scarce resources to help satisfy changing wants & needs

Question 4

Productive efficiency?

Answer 4

When firms deliver the highest possible output using the least amount of scarce resources - frims produce output at the lowest possible unit cost

Question 5

Allocative efficiency?

Answer 5

When scare resources are used a way that maximises consumer satisfaction

Question 6

What does productive and allocative inefficiency mean?

Answer 6

Productive inefficiency means firms are not maximising output from given inputs - there is a loss in potential output (graph)
Allocative inefficiency means scarce resources are not being used in a way that maximises consumer satisfaction

Question 7

What are externalities?

Answer 7

The effect of consumption and production on people who are not directly involved (third parties)