Year 1 micro - different types of markets Flashcards
what is a market economy
an economy where the private sector owns all resources in the economy and allocates goods and services through the market mechanism
what is a command economy
an economic system where all decisions about how to allocate resources are made by the government
what is a mixed economy
an economic system that allows for some government intervention where the market fails to allocate resources efficiently
market economy vs command
- profit motive in market, welfare maximisation in command
- high freedom of choice in market, lower in command
- competition higher in free market
- role of government low in free market
- variety and quality of goods and services higher in market
- quicker respond to demand in market economies, slow in command
- more inefficient in command
- merit goods are under provided and demerit goods are overprovided, compared to command
- under provision of public goods in market economy
- higher income inequality in market
- monopolies in market economy, none in command
why is the quality and variety of goods and services higher in a market economy
- there’s a high incentive to maximise profits and produce goods and services that consumers want/need
- so they will want to produce a variety of goods to satisfy consumers
What is a free market?
Any place where buyers meet sellers to exchange goods and services, free from government intervention
what happens at allocative efficiency
- resources perfectly follow consumer demand
- society surplus if maximised
- net social benefit is maximised
pros of free market economy
Allocative Efficiency
- In a free market, resources are allocated based on supply and demand, achieving allocative efficiency.
- Prices act as signals, directing resources to their most valued uses where consumer demand is highest. Producers respond to these signals by increasing supply for popular goods and services.
- Ensures that resources are not wasted on goods or services that are not in demand, maximizing overall societal welfare.
Automatic Correction of Disequilibrium
- The price mechanism naturally eliminates excess supply or demand.
- If there’s a surplus, prices fall, encouraging demand and reducing supply; if there’s a shortage, prices rise, discouraging demand and increasing supply.
- Prevents prolonged shortages or gluts, maintaining market stability without the need for government intervention.
- Encourages Competition
- Competition among firms drives innovation, lowers prices, and enhances consumer choice.
- Firms strive to attract customers by improving product quality, reducing costs, and offering competitive prices. This increases consumer surplus as individuals gain access to a wider range of affordable products.
- Leads to higher productivity and economic dynamism, benefiting consumers with lower costs and greater variety. - Dynamic Efficiency and Investment
- Profit motives encourage firms to reinvest in research and development.
- Companies innovate to reduce costs, improve efficiency, and differentiate their products. This leads to advancements in technology and productivity gains over time.
- Sustains long-term economic growth, creating a cycle of innovation and reinvestment that benefits consumers and producers. - Job Creation and Economic Growth
- High output levels generate employment opportunities as labor demand increases.
- Since labor is a derived demand, increased production requires more workers. Economic growth driven by high output expands industries, further increasing employment.
- Reduces unemployment, boosts incomes, and raises living standards, contributing to overall economic well-being.
6Freedom and Choice
- Consumers and producers enjoy greater liberty without government intervention.
- Individuals can make decisions based on their preferences and self-interest, leading to diverse products and services in the market.
- Increases individual satisfaction and autonomy, as people have the freedom to choose their consumption and production patterns.
- No Risk of Government Failure
- A lack of government intervention eliminates inefficiencies associated with poor policy-making.
- Government failures, such as misallocation of resources or corruption, are avoided in a free market. Decisions are driven by market forces rather than political motives.
- Reduces bureaucratic inefficiencies and ensures that resources are allocated based on economic merit, not political considerations.
cons of free market economy
- markets can fail, allocative efficient not guaranteed
- we assume that there are no barriers to entry, that there are many sellers who are competitive, this may not be the case, monopolies
- there may be imperfect information, and consumers may not make rational decisions
- externalities may be ignored due to the profit motive
- inequity given inequality , may exclude many consumers from accessing /affording price of goods, bad if the food is a necessity
- excessive profiteering, firms could be maximising profit in a way that is bad for society
- creative destruction, new firms joining the market could destroy pre existing firms, could lead to higher unemployment
- prices can be highly volatile, especially in agricultural and commodity market, demand and supply highly inelastic, high prices , burden on consumer, low prices , burden on producers
What is specialisation?
The concentration of production on a narrow range of goods or services
advantages of specialisation
Higher Output Leading to Higher Incomes
- Specialisation enables workers and firms to focus on tasks they are most skilled at, increasing output.
- As output rises, firms generate more revenue, which can lead to higher wages for workers and greater profits for businesses.
- This leads to overall economic growth and higher living standards in the long term.
Wider Range of Goods and Services
- Specialisation allows different regions and countries to produce goods they excel in, enabling trade.
- This results in a more diverse market, offering consumers a greater variety of goods and services.
- Access to a broader range of goods can enhance consumer satisfaction and living standards.
Greater Allocative Efficiency
- Resources are allocated more effectively as production focuses on goods and services where countries or firms have a comparative advantage.
- This reduces waste and ensures that resources are directed toward their most productive uses.
- Improved allocative efficiency benefits the economy by maximizing utility from available resources.
Increased Productivity
- Repetition of tasks through specialisation improves worker skills and efficiency, leading to higher productivity.
- Firms can invest in specialized machinery and processes that further enhance efficiency.
- Higher productivity lowers costs per unit, allowing firms to remain competitive and potentially reduce prices for consumers.
disadvantages of specialisation
- finite resources , companies or countries that are overspecialised and require a certain input in their production like oil, what happens if oil is depleted? collapse of business
- change in fashion/tastes - overspecialised businesses that haven’t diversified may be at risk
- if foreign firms become more efficient than another industry abroad, the original industry will de industrialise, higher unemployment rates
- international relations issues may cause trade to be blocked off, specialisation inefficient
for specialisation to work, what needs to happen
- there needs to be mutually beneficial trade, countries need to be able to export their surplus of goods/services that they are efficient at producing and import those that they are inefficient at producing
what is division of labour
breaking down the production process into separate tasks upon specialisation
advantages of division of labour and specialisation
1.increased productivity
- division of labour allows workers to focus on specific tasks, developing specialised skills and increasing their efficiency in that task
- higher productivity boosts total output, reducing production costs and potentially lowering prices for consumers, making products more accessible
- time savings
- by dividing tasks, workers avoid the time lost in switching between tasks, which enhances work flow and reduces downtime
- faster production cycles allow firms to increase output and meet demand more efficiently, leading to quicker delivery and higher customer satisfaction - Skill development
- specialisation enables workers to build an expertise in a single task, leading to higher quality and precision in their work
- improved skill levels result in better quality goods and a more reliable production process - Technological innovation
- repetitive tasks encourage the development of new techniques and machinery to simplify work, as workers and managers identify efficiencies
- innovation in processes and technology reduces costs, further enhancing productivity and leading to more advanced and competitive products - efficient use of resources
- workers focusing on specialised tasks reduce waste of time, effort, and materials, achieving greater efficiency with the resources at hand
- efficient resource use optimises output, conserves resources, and allows firms to reinvest savings into other areas
