Theme 1 - Market Mechanism Flashcards
Price mechanism
Rationing function: limited supply will be rationed to those buyers willing and able to pay the higher price, the movement up the demand curve shows the rationing function, higher prices lead to a rationing.
Incentive function: higher prices provide an incentive to existing producers to supply more because they provide the possibility of more revenue and increased profits, it is associated with an extension of supply.
Signaling function: rising prices give a signal to consumers to reduce demand, it signals to potential produces to enter a market.
Rational behaviour of economic agents
Resource allocation: the way in which a society’s productive assets are used amongst their alternative uses.
- objectives of households: maximise the utility it can achieve from consuming goods and services, what they perceive to be the best value.
- objectives of firms: is to make as much profit as they can, if they are behaving rationally and aiming to make the most profit they are profit maximising.
- objectives of the government: it aims to raise revenue to finance its expenditure. Common goals are: economic growth low unemployment, low inflation.
Alternative views of consumer behaviour - Why might economic agents not always act rationally?
- different consumer value things differently
- consumers may wish to maximise utility even though future utility may be greater.
- difficulty in putting the correct value on choices.
Reasons why consumers may not act rationally
Influence on other people’s behaviour: buying a product because other people are.
Importance of habitual behaviour: this occurs when people buy the same brand product because they always have done.
Consumer weakness at computation: the idea that consumer are unable to work out which product actually represents the best value due to a) information overload b) lack of information c) consumers can not calculate accurately d) impulse buys.
Altruistic behaviour: self-sacrificing such as giving to charity.
Economic systems
Free-market economy: market forces are allowed to guide allocation of resources within the economy.
A command economy: decisions on resource allocation are guided by the state.
Mixed economy: resources are allocated partly through price signals and partly on the basis of direction by the government.
Free-market: what? How? For whom?
What? Anything that brings the producer enough profit.
How? Method of production that is cheapest.
For whom? For those who are willing to pay the most.
In the free market there is consumer sovereignty where the consumer drives what is produced. The governments role in the free market is to provide the legal framework.
Command economy: what? How? For whom?
What? Whatever the government decide.
How? Decided and controlled by the government.
For whom? Everyone in the population.
