UNIT 1 AOS 1 - PART 2 (elastitiy + market failure) Flashcards
Market Failure| def
= ↓ allocation of resources (MISALLOCATIONS)
= ↓ production
= ↓LS (or economic welfare)
MF occurs when market forces operate to allocatre resources to produce a combination of g/s that does not maximise the wellbeing of society
Elasticity| def & DOMINO
- Elasticity - the responsiveness of quantity supplied or demanded to a change of price The more elastic the more it bends (changes)*
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* Define PED/PES
* LOW (INELASTIC) /HIGH (ELASTIC)
* WHY - factor? Relevant
| less responsive = less change
Factors of Elasticity Demand
A change in the % of price may yield a greater/less change in the proportion of QD
* !!degree of necessity - nessary goods and services = inelastic
(e.g., change in tesla price = greater change in quantity demanded
-
!!Availability of substitutes – no substitutes = inelastic
(e.g., change in iPhone price = not that much change in quantity demanded (assuming Apple holds some kind of Monopoly)) -
Proportion of income – more expensive (↑take income) = more elastic
(e.g., pen is cheap so increase in price won’t impact demand that much)
(car = expensive = people wait to buy the car = more elastic) - Time – need now = inelastic, wait = more elastic.
Factors of Elasticity Supply
-
!!!Spare Capacity: have spare resources = more elastic
(can respond to change in price)
(e.g., increase demand in headphones = if firm has spare capacity can respond to an increase in demand) - Production Period: long time to create = more inelastic for a change in price (e.g fruit, veg etc) visa versa
-
!!!Durability: goods stored longer (non-perish goods) = more elastic (can respond quickly to market mech) such as tech
Perishable goods = limited window which they can be sold for (e.g., fruit)
The ability to be DE depends on PES
MF: Public goods
ddef, explan, market failure
- non-depletable (everyone enjoy the same consumption - non-depletable = cannot be used up)
- non-excludable (cannot exclude the benefits from a person)
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- Free rider problem - profit oriented firms = no supply of public goods (as no profit is being made)
================= (just know long term)
- Short term (government subsidies):
- OVERALL: LOWER COP
- increase allocation of resources to the g/s
- gov gives incomes to offer free to public
- subsidies to cover cop
- Long term (govt provision):
- govt full provide (provision) of public goods
- govt will employ defense, invest, allocate resources
- incentive to attract labour
TALK ABOUT OVER/UNDER ALLOCATION
MF: negative externalities
def, what?, gov intervention
3rd party is impacted by a person’s transactions that is often referred to as spillovers
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Ø negative externality = over allocation of resources
* Smokes = cost of 3rd parts = ↑health costs
* producers: profit motive = allocate resources to max profit = doesn’t care about third part impact (self interest)
* consumer: private benefit > social benefit
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laws (legislation) ban (production or consumption) certain activies
e.g., cigs
Private benefit = marginal utility (happiness) that a person receives from consumption
Social benefit = consumption leads to some 3rd party benefit may lead to a social benefit
MF: positive externalities
def, what?, gov intervention, e,g,
3rd party is impacted by a person’s transactions that is often referred to as spillovers
Positive externality = under allocation of resources
* Education = less crime = more life = more cohesive society
* Producers: private cost (COP) > social costs
* consumer: act in self interest
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subsidies to reduce cop
e.g., education
TALK ABOUT OVER/UNDER ALLOCATION
Asymmetric info - market failure
Asymmetric info - market failure
def, what?, gov intervention, e,g,
one party has more information than the other in an exchange)
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Information sellers > buyers: Adverse selection
* hiding of info (quality)
* misleading info (health products)
* consumers don’t understand data (only experts know)
Short term
* seller - more information short run
* overallocation of resources
Information buyers > sellers: moral hazards
* personal info (holidays, insurance)
* (moral hazards) changing behaviour once transaction has been made
=================
* regulations - protect from misleading inform (aust consumer law)
2nd hand cars
TALK ABOUT OVER/UNDER ALLOCATION
MF: common access resource
def, what?, gov intervention, e,g,
non-excludable*
* not owned by anyone
* no market price**
* are depletable, rivalrous (like nature), non-excludable
* (overconsumption of good) -> why
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unsustainable use of common resources = environmental problems
* lack of excludability and no prices = excessive production and consumption = use common resources
* overconsumption of good
* inter-temporal efficiency is compromised
====== (know one)
* regulations: ban the use of certain CARs (e.g., fishing restrictions)
* regulations: need permit to do things
fish
TALK ABOUT OVER/UNDER ALLOCATION
Government Failure (eg)Cigarettes| interventions + unintended consequences
Government Failure (eg)
interventions + unintended consequences
Gov failure:
* intervention leads to a imbalance allocation of resources
* AE worse and misallocation of resources because of it
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Government intervention
* indirect tax producers
* ↑ cost of cigarettes
Unintended consequences
* chepaer illegal sustitutes
* black market = use of police resources (into from bay/airport areas)
* less police resources in local area = increase crime rates
* resources not allocated to max living standards - AE BAD (as cig = negative externalities)
All allocative efficiency not achinved
TALK ABOUT OVER/UNDER ALLOCATION
