unit 5: key words

Question 1

signalling function of prices

Answer 1

prices provide information to buyers and sellers

Question 2

incentive function of prices

Answer 2

prices create incentives for people to alter economic behaviour
ie higher price = firms supply more / consumers to try substitutes

Question 3

rationing function of prices

Answer 3

rising prices ration demand for a product

Question 4

allocative function of prices

Answer 4

changing relative prices to allocate scarce resources away from markets exhibiting excess supply
into markets with no excess demand

Question 5

market failure

Answer 5

market mechanisms leads to misallocation of resources
can completely fail to provide wrong good
or provide the wrong quantity

Question 6

missing market

Answer 6

no market because the functions of prices have broken down

Question 7

private good

Answer 7

good that’s excludable and non rival

Question 8

public good

Answer 8

good that’s non excludable and non rival

Question 9

quasi public good

Answer 9

not fully rival or excludable

possible to exclude people from using it

Question 10

externality

Answer 10

public good / public bad
external benefit / external cost - ‘dumped’ on third parties
produced or consumed outside of the market

Question 11

positive externality

aka external benefit

Answer 11

consumption or production = benefit to third parties

social benefit is greater than private benefit