Microeconomics - L11 Market Failures (Public Goods)

Question 1

Define ‘efficient allocation of resources’

Answer 1

EAR occurs when an economy is maximising its output from its inputs and maximising the nations living standards.

Question 2

Define ‘living standards’

Answer 2

The total welfare of all people in a country like Australia, made up of both material (i.e. access to goods and services) and non-material (i.e. quality of life such as literacy rates, crime rates, air quality etc) factors.

Question 3

What are the 4 key features of a monopolistic competition market?

Answer 3

1. Many buyers and sellers (high competition).
2. Product is NOT homogenous.
3. Easy entry and exit
   (no or low barriers).
4. Both buyers and sellers are price takers.

Question 4

What impact does a MCM have on prices?

Answer 4

Many sellers means high levels of competition so in order to be able to sell their product and make a profit, producers/suppliers need to charge a similar price as the competition. This means that prices will be as low as possible.

Question 5

What impact does a MCM have on living standards?

Answer 5

Lower prices resulting from high levels of competition means greater access to goods and services for consumers (material living standards). Increased satisfaction and wellbeing from improved quality of life (non-material living standards).

Question 6

What impact does a MCM have on efficient allocation of resources?

Answer 6

Many buyers and sellers in a MCM means high levels of competition.
Businesses therefore need to maximise their output from any given level of inputs = an efficient allocation of resources in order to be competitive.

Question 7

What are the 4 key features of a monopoly?

Answer 7

1. One seller / supplier
2. Product differentiation is not important
3. Barriers to entry and exit are extremely high
4. Firm is a price maker.

Question 8

What does ‘market power’ mean?

Answer 8

The ability of a firm to control or influence prices and the output of an industry.

Question 9

What impact does a monopoly have on prices?

Answer 9

There is no competition as only one firm. Therefore, there is no incentive to use resources efficiently in order to remain competitive. This means that prices will be higher.

Question 10

What impact does a monopoly have on living standards?

Answer 10

Living standards are negatively impacted as there is no incentive to keep prices low for consumers. This reduces consumers’ access to goods and services, therefore reducing living standards.