1839175
Description
Flashcards by Amardeep Kumar, updated more than 1 year ago
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Created by Amardeep Kumar
over 9 years ago
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| Question | Answer |
| What are the three functions of the market? | •To allocate scarce resources in the light of unlimited wants •To signal to buyers and sellers that market conditions have changed •To incentivise buyers and sellers to respond to changes in the market |
| Define market failure. | Market failure is the consequence of the market failing to allocate scarce resources so the economic welfare of consumers is maximised rather than the few. Market failure implies that some consumers are being made worse off because of how the resources are being allocated. |
| What are private costs? | These represents the cost to the producer or consumer. For the producer, this is the cost of producing a good, plus an element of profit - this determines the price, which is the cost to the consumer. |
| What is private benefit? | This is the benefit to the producer or consumer. For the producer, this can be derived from higher revenue. For a consumer, the private benefit is derived from the consumption of a product or service. |
| What are social costs? | This represents the negative consequence for society arising from the production and consumption of an economic good e.g. car production and consumption can cause deaths, accidents, congestion, CO2 pollution etc. |
| What is social benefit? | This represents the positive consequence for society arising from production and consumption of an economic good e.g. car production and consumption creates employment for workers and other services like maintenance and fuel. |
| How is the market price determined? | The market price is determined by the interaction of buyers and sellers who base their decisions on their private costs and benefits. This is how the market misallocates scarce resources. |
| What are externalities? | These are the external costs and benefits generated in either production or consumption of a good which are not paid for by the producer or consumer but by society. Externalities can therefore be either positive or negative. |
| Why do producers and consumers ignore externalities? | The market can choose to ignore externalities because producers and consumers don't pay for them or benefit from them. |
| What are external costs? | This is the cost generated in production and/or consumption that is not paid for by the producer or consumer but by a third party in society. |
| What are external benefits? | This is the benefit generated in consumption or production that is not enjoyed by the consumer or producer, but is enjoyed by a third party in society. |
| How is the social cost calculated? | The social cost is the private cost and external cost combined. This represents the true value of the cost to society of an activity. |
| How is the social benefit calculated? | The social benefit is the private benefit and external benefit combined. This represents the true benefit to society of an activity. |
| What are the characteristics of positive externalities in production? | •The marginal private cost of production exceeds the marginal social cost. •The social equilibrium is greater than the market equilibrium, which means that the good is being under-produced and consequently under-consumed e.g. improving quality of staff training. |
| What are the characteristics of negative externalities in production? | •The marginal social cost exceeds the marginal private cost of production. •The market equilibrium is greater than the social equilibrium, which means that the good is being overproduced and consequently over-consumed e.g. fossil fuels. |
| What are the characteristics of positive externalities in consumption? | •The marginal social benefit of consumption exceeds the marginal private benefit. •The social equilibrium is greater than the market equilibrium, which shows that the good is being under produced and consequently under-consumed e.g. cycling. |
| What are the characteristics of negative externalities in consumption? | •The marginal private benefit exceeds the marginal social benefit of consumption. •The market equilibrium is greater than the social equilibrium, which shows that the good is being overproduced and consequently over-consumed e.g. alcohol. |
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