Microeconomics Booklet 3 Flashcards
What does it mean if a good is excludable?
If someone else can be prevented from benefiting from it.
What does it mean if a good is rivalrous?
One persons consumption affects someone else’s ability to benefit from it.
What is a private good?
A private good is excludable and rivalrous.
What is a public good?
It is non-rivalrous and non-excludable.
What is the free-rider problem?
Comes from non-excludability. If no-one can be prevented from gaining the benefiting without paying, nobody has incentive to buy.
What is the marginal cost of a public good?
Zero, as they’re non-rivalrous.
What is a quasi-public good?
Either excludable and non-rivalrous.
Or Rivalrous and non-excludable.
What is market failure?
Fails due to a misallocation or resources, often seen as failure to achieve allocative efficiency. Net welfare loss. Free market.
What is the signalling price function?
Give information to traders to enable them to plan their economic activity.
What is incentive price function?
Based on the signals economic agents alter their behaviour.
What is the rationing/ allocative process function?
Describe how resources are used.
What is partial market failure?
When a market does provide a good but in an allocatively inefficient quantity.
What is the Tragedy Of The Commons?
The effect of individuals acting in a way where their own self-interest is contrary to what is best for society.
What is a Merit good?
More beneficial, they’re under-consumed. Demand moves to the right.
What is a demerit good?
More harmful, they’re over-consumed. Demand shifts to left.
What is Information failure?
Consumers either over or under consume as they don’t have information, don’t understand the information or do not take the information into account.
What is an experience good?
You need to experience them to know more about them.
What is a search good?
You will know the right product when you find it.
Some examples of markets that fail due to information failure.
- 2nd hand cars
- Antiques
- Housing
What is positive externalities?
Benefit to 3rd party.
What is negative externalities?
Cost to 3rd party.
Externality graphs.
What is a marginal private cost?
The cost to those directly involved. MPC.
What is Marginal social cost?
The cost to society as a whole. MSC.
What is government failure?
When government intervention in the economy or market leads to a misallocation of resources - net loss welfare. Arising from government intervention.
What is government intervention?
When government intervene to correct market failure.
What are the causes of government failure?
1) Unintended consequences.
2) Information gaps.
3) Conflicting objectives.
4) Excessive administration costs.
5) Distortion of price signals.
What is indirect tax?
A tax levied on goods and services, to increase a firms cost of production. Suppliers earn less profit. Supply curve shifts to the left.
Evaluation of indirect tax?
1) Opportunity cost
2) Risk of black markets
3) Effectiveness depends on PED
What are subsidies?
A grant given by the government, decreases firms cost of production. Suppliers earn more profit. Supply curve shifts to the right.
Evaluation of subsidies?
1) Effectiveness depends on PED
2) Real resource opportunity cost
What is a regulation?
Laws passed and enforced by the government. Increase a firms cost of production. Suppliers less profit. Supply curve shifts to the left.
Evaluation of regulations?
1) Opportunity cost of monitoring and policing.
2) Can be ignored.
3) Black markets arising.
What is information provision - demerit good?
Government launches campaign the the harmful effects of consumption.
Information provision for merit good?
Government launches campaign to promote health benefits of eating fruit.
Evaluation on information provision?
1) Can be ignored.
2) People may not understand information.
3) Opportunity cost - money spent on advertising.
What is minimum pricing - floor price?
No seller can charge below a price that the government insists on.
What is maximum pricing - ceiling price?
No seller can charge a price above the one imposed.
Evaluation points of Price gaps?
1) Punishments must be effective
2) Government needs to correct information
What is state provision?
Something provided by the government, free at the point of consumption.
What are tradable permits?
Government imposes a limit on amount of pollution that can be emitted, companies can then trade for example CO2.
Who was the theorist that created behavioural economics?
Adam Smith.
What is the ‘invisible hand’?
Individuals do what’s best for others by doing what’s best for themselves.
What assumption is used?
People know what’s best for themselves and then do it.
What is behavioural economics?
Gain isight from other sciences - psychology- that conclusion drawn might be valid and include physiological, emotional and social elements of decision making.
3 limitations face people when trying to act rationally?
1) Limited time
2) Brain cannot process all information
3) Information may be unreliable
What is utility satisficing?
Setting for utility that’s best for them, not pursing utility to full.
What is a heuristic?
‘Mental shortcut’
What is Anchoring?
Particular price of information skills an agents perception and gram of defence such that they base their valuations on.
What is availability bias?
Economic agents misjudged the likelihood of an occurrence based on only most recent evidence or well-known example.
What is social-norms?
Following what other people do.
What is altruism?
Acting out of corner to others.
What is framing?
Tendency of individual to be influenced by the context of which the information is presented.
What is default choice?
A pre-set choice. Individuals must be conscious decision to change.
What is mandated choice?
Individuals forced to make choice without a default being set.
What is limited choice?
Limited options to prevent problems.
What are nudges?
Must be low cost. Encouraging individuals to change their behaviour in a predictable way. Without removing ability to chose.
Evaluation?
1) Freedom to choose means freedom to choose badly
2) ‘Shove’ regulation - effective however could seem stupid.
3) low cost- low opportunity cost.
