market structures and failures

• the price mechanism 


  • used in market economic systems and the private sector of mixed economies to allocate resources.
  • uses the forces of demand and supply to determine the price of a product
• process of price mechanism

  • if the demand for a product increases, there will be a shortage and will cause market price to rise
  • the price acts as a signal to the producer who is motivated by price
  • if market price rises the good becomes more profitable to supply than other goods
  • resources are reallocated to the production of the more profitable goods and away from the less
• characteristics of perfect competition

  -many buyers and sellers

  -no barriers to entry/exit

  -firms are price takers, as they are too small and insignificant to alter market price

  -identical products

  -perfect information

  -productively and allocatively efficient

  -abnormal profits made in the short run and normal profits made in the long run
• characteristics of a monopoly

  -one supplier in the market

  -very strong barriers to entry/exit

  -firms are price makers

  -products must be unique

  -abnormal profits are always made

  -firms are productively and allocatively inefficient

  -short run profit maximiser
• market failure occurs when a market fails to allocate resources efficiently
• a monopoly leads to higher prices and lower quality because of the lack of competition. firms take advantage of their consumers governments intervene by regulation, using CMA who have the power to prevent merges
• governments provide public goods.

  goods and services private firms wouldnt produce due to a lack of profit.

  they are non-excludable and non-rival.
• governments provide merit goods.

  if they didnt, people would underconsume them as they cant afford to pay for it
• negative externalities are costs which private firms do not account for in production, imposed on a third party, eg pollution. governments intervene with fines and taxes
• positive externalities are products which benefit society but may be underprovided by market. eg vaccines. governments intervene by providing firms with subsidies or education of benefits
• the immobility of factors of production leads to unemployed resources.
• inefficient allocation of resources is caused by income inequality.

  wealthier people have more choice as they have more money to spend, so firms produce products to satisfy them, neglecting the choice of lower income consumers. governments intervene by making taxes progressive