The allocation of resources: how the market works; market failure Flashcards
what is an economic system?
economic system describes the way in which the economy is organised and run including alternative views of how resources are best allocated
what are the three kinds of economic systems and the crux of each?
Market : resources are allocated based on market forces
planned : relies on government allocating resources
mixed : combination of both market and planned
5 advantages of planned economic system
economies of scale prevent wastage social equality social protection employment of resources
3 disadvantages of planned system
lack of economic freedom
lack of incentives
bureaucracy
3 advantages of market system
efficiency
freedom of choice
incentives
2 disadvantages of market system
environmental issues
income and wealth inequalities
define demand
ability and willingness of customers to pay a certain price to buy a good or service
what does the market demand curve refer to ?
the sum of all individual demand for a product. it is found by adding up all individual demand at each price level.
determinants of demand are ?
marketing
income
substitutes
complements
when is a movement caused and when is a shift caused
movement is caused when there is a change in the price
shift is caused when there is a change in one of the factors of demand or supply
define supply
it is the ability and willingness of firms to provide goods and services at given price levels
market supply curve refers to ?
the sum of all supply at each price level
determinants of supply are ?
weather
ict
taxes
subsidies
what is equilibrium price?
the demand for a product= the supply of product at equilibrium price
what will happen if the price is set too high?
excess supply leading to a fall in price
what will happen if the price is set too low ?
excess demand leading to a rise in price
what is ped?
ped measures the degree of responsiveness of quantity demanded for a product following a change in its price.
what are four used of ped?
pricing strategy
impact following a change in exchange rate
price discrimination
sales tax determination
when is a good said to be price inelastic
if ped/pes is less than one ( ignoring the minus sign)
when is a good said to be price elastic
if ped/pes is greater than one (ignoring the minus sign)
determinants of ped
time
habits
income
substitutes
define pes
pes measures the degree of responsiveness of quantity supplied of a product following a change in its price
determinants of pes
degree of spare productive capacity level of stocks number of producers time period ease and cost of factor substitution
why is it preferable for firms to have a relatively high pes
can help make the firm more competitive and therefore generate more sales revenue and profit
unitary price elasticity is when?
price elasticity = 1
when does market failure occur
market failure is said to occur when the forces of demand and supply fail to allocate resources efficiently
define demerit good
has negative spillover effects on a third party
define merit good
has positive spillover effects on a third party
define private costs
the actual cost of a firm individual or government eg road tax, petrol and cost of purchasing the car
define external cost
negative side effects of production or consumption incurred by third parties for which no compensation is paid eg congestion and air pollution
social cost
true cost ie private cost + external cost
how can the government solve market failure
imposition of taxes or imposing rules and regulations
advantages and disadvantages of government intervention to solve market failure
Advantages Disadvantages
increases the price and certain goods are price
hence should reduce demand inelastic
creates tax revenue regressive taxation
awareness is spread formation of underground markets which could
be far more severe
private benefit
benefits of production and consumption incurred by a firm, individual or government
external benefit
positive side effects of production or consumption incurred by third parties for which no money is paid by the beneficiary
social benefit
the true benefit ie private benefit+ social benefit
