Save
econ - micro y1
Save
Share
Learn
Content
Leaderboard
Learn
Created by
Federico Chiesa
Visit profile
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
stakeholders
of 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)
See all 708 cards