The Mechanism And Market Failure - Micro (keywords) Flashcards
Define free market economies
Controlled by the market forces of supply and demand
Define command economies
When a central government dictates the allocation of all goods and services and the prices that may be charged for them
Define mixed economies
Some free market elements and some socialist elements
Define competitive markets
Markets that allocate resources efficiently to satisfy consumer wants
What are the 3 functions of the price mechanism?
- signalling function
- rational function
- incentive function
Define the price mechanism
When demand and supply determine the prices of commodities and the changes within them
Define market failure
When a free market left to its own devices fails to deliver economic efficiency and the interaction of supply and demand does not lead to productive and/or allocative efficiency
Define complete market failure
When the market does not provide a good or service at all, even though there is demand for it
Define partial market failure
When he market provides the incorrect quantity of goods/services
Define allocative efficiency
When the right amount is being produced
What is the price calculation?
Marginal cost - allocative efficiency
Define productive allocation
The lowest unit cost that can produce the best amount of resources
Define utility
Satisfaction recieved from consumption
What is the result of consumers being rational
They are utility maximisers
Define marginal
The additional utility/cost recieved from consuming/producing one extra unit
What are the five causes of market failure
*externalities
*public goods
*information failure
*imperfect competition
*inequality
Define the signalling function of the price mechanism
To demonstrate where resources are required
Define the rational function of the price mechanism
One that can be displayed on a PPF (price and quantity)
(how productive/allocatively efficient it is)
Define the incentive function of the price mechanism
Something that motivates a producer or consumer to follow a course of action or change behaviour
