econ - micro y1

Cards (708)

  • Market failure
    Occurs where the free market fails to allocate scarce resources at the socially optimum level
  • Reasons for market failure
    • Externalities (negative and positive)
    • Merit and demerit goods
    • Public goods
    • Common access resources
    • Income inequality
    • Monopoly power
    • Factor immobility
  • Externalities
    Negative impacts or positive impacts on third parties as a result of production or consumption
  • Merit and demerit goods

    Goods or services that are either worse for us than we think or better for us than we think, due to imperfect information
  • Public goods
    Goods where there is a free rider problem, so firms will not supply them
  • Common access resources
    Resources that are over-consumed and over-produced due to negative externalities
  • Income inequality
    Can be a source of market failure on grounds of equity (fairness)
  • Monopoly power
    Occurs when there is only one dominant seller, leading to higher prices and lower quantities than socially optimal
  • Factor immobility
    Occurs when factors of production (e.g. labour) cannot respond to changes in demand, leading to a misallocation of resources
  • Minimum price
    A fixed price or a price floor enacted by the government usually set above the equilibrium market price
  • The government is saying the equilibrium price in the market is too low, so they want to raise it by implementing a minimum price
  • Price floor
    The lowest price that can legally exist in the market
  • Reasons for governments to use minimum prices
    • To protect producers from price volatility, especially farmers and producers of primary commodities
    • To solve market failures by raising price, discouraging consumption and production of goods/services that do harm to society
  • Impact of minimum price
    1. Price increases
    2. Demand contracts
    3. Supply expands
    4. Excess supply (surplus) created
  • Excess supply created
    Burden on producers as they have high costs but can only sell the lower quantity demanded
  • Government intervention to address excess supply

    Intervention buying - government buys up the excess supply
  • Cost of intervention buying
    Price of minimum (pmin) multiplied by the quantity of excess supply (qdqs)
  • With intervention buying

    Producer revenue increases (pmin * qs)
  • Without intervention buying

    Producer revenue only increases by (pmin * qd)
  • Minimum price creates a deadweight welfare loss
  • Impact on stakeholdersof government intervention

    • Consumers - higher prices, lower affordability, regressive effect
    • Producers - protected from price volatility if there is intervention buying, but may struggle without it
    • Government - concerned about cost of intervention buying, unintended consequences like black markets
  • Production possibility frontier (PPF) or production possibility curve

    Very useful tools to illustrate the ideas of scarcity and choice in economics
  • PPF/PPC
    • Shows the maximum possible production of two goods or services that can be produced with a given level of factors of production
    • Shows the various combinations of two goods and services that can be produced with a given level of factors of production
  • Macro PPF
    • Shows the maximum possible production of all goods and services that can be produced with the level of factors of production in the economy
    • Shows the various combinations of all goods and services that can be produced with given factors of production in the economy
  • PPF/PPC
    • Can show concepts like opportunity cost and efficiency
  • Opportunity cost
    The cost of producing one good in terms of the other good that must be given up
  • Concave PPF/PPC
    Illustrates the law of increasing opportunity cost
  • Linear downward sloping PPF/PPC

    Illustrates constant opportunity cost
  • Productive efficiency
    • Using all factors of production to their maximum level to get maximum production
  • Productively efficient point
    Any point on the PPF/PPC curve
  • Productively inefficient point
    Any point inside the PPF/PPC curve
  • Allocative efficiency
    Whether what is being produced is satisfying consumer demand
  • Pareto efficiency
    Nobody can be made better off without making somebody else worse off
  • Pareto efficient point
    Any point on the PPF/PPC curve
  • Increasing production on a PPF/PPC
    1. Use factors of production better
    2. Reallocate factors of production
    3. Shift the PPF/PPC curve by increasing quantity and/or quality of factors of production
  • Supply
    The quantity of a good or service that producers are willing and able to produce at a given price in a given time period
  • Law of supply
    • There is a direct relationship between price and quantity supplied
    • As price increases, quantity supplied increases
    • As price decreases, quantity supplied decreases
  • Price changes
    We move along the supply curve
  • Price increases
    Quantity supplied increases (extension/expansion of supply)
  • Price decreases
    Quantity supplied decreases (contraction of supply)