micro year 1 (part 2) Flashcards
what is a minimum price an example of
a price control
what is a minimum price, when would it be used
- a fixed price enacted by the goverment usually set above the equilibrium market price
- legally it is the lowest price that can exists in the market after implementation
- used if the price in the market is to low for any reason
why would goverments use minimum prices
general
- protect producers from price volatility
- solver markets failures
what does price volalility mean
The term “price volatility” is used to describe price fluctuations of a commodity
Draw a full minimum price diagram and label everything
- price: has increased from p1 to p min
- quantity demanded: decreased from Q1 to Qd
- quantity supplied: increased from Q1 to Qs
- excess supply: Qd, Qs
- cost of intervention buying: Qd, Qs, b, c
- producer revenue with intervention buying: Pmin, c, Qs
- prodcuer revenue without intervention buying: Pmin, b, Qd
- deadweight welfare loss: a, b, d
what is intervention buying
when the goverment comes and buys up the excess supply of goods brought about by a minimun price
How would consumers feel about a minimum price
- they would not like it, because they are paying higher prices, there consumer surplus is being eroded, quantity is lower, choice is lower, if your a low income house hold affordability is lower, they have a regressive effect, over the long term consumers suffer because they have to bare the cost of intervention buying (taxes will be higher, they could be cuts to other areas of goverment spending, the goverment could be borrowing money and thus paying debt intrest on that borrowing which has a large oppurtunity cost), theres an overall oppurtunity cost of intervention buying
- you could argue that consumers like the fact that industires are surviving
How would producers feel about a minimum price
if intervention buying occurs good
can be gains in revenue
depends on PED of good
gains of producer surplus
How would the goverment feel about a minimum price
- in theory they would like minimum prices if there core goals are being reached, but they would be concerned about the impact on consumers, they would be concerened about unintended consequences such as black markets forming, they would also be concerened about intervention buying costs, they are baring the excess supply (are they gonna store it,costly , are they gonna destory it,waste, they may dump it for low prices to overseas,not allowed to do,)
what is maximum price an example of
a price control
what is a maximum price
- A fixed price (price ceiling) enacted by the goverment usually set below the equilibrium market price
- legally prices cannot go above it
why would the goverment use a maximum price
to increase affordability of necessity goods and services
What are some examples of where maximum prices are used in the real world
rented accomadation
groceris
public transport
draw a full maximum price diagram with all parts labeled
price: falls from P1 to Pmax
quantity demanded: goes from Q1 to Qd
quantity supplied: goes from Q1 to Qs
Excess demand: Qd, Qs
Producer revenue: goes from P1, a, Q1 to Pmax, b, Qs
Deadweight welfare loss: a, b, d
what would the attitude of consumers be towards a maximum price
- They would like it as long as they can access the market, as they are benefiting from lower prices, they are seeing greater affordability, their consumer surplus is rising, their welfare is rising
- But there is a large amount of consumers that are not able to enter the market at all (they fall into the excess demand)
^ this could lead to them source alternative supply, for example smuggling or sourcing the black market or they queue for a long time, are on massive waiting lists
what would the attitude of producers be towards a maximum price
they would not like it, as there is a fall in producer revenue, there is a fall in producer surplus, a lot of producers would be leaving the market or providing something else that does not fall under the regulation, could lead to a decrease in their living standards
What would be the goverments attitude towards a maximum price
They would like it if it achieves there key goals, but they would be concerned about the impact on producers and there leaving of the market and they would be concered about the excess demand and what it means for consumers, they would also not like the unintended consequences of black markets forming, the goverment would also be concered about the deadweight welfare loss
How could goverments intervein in a market with a maximum price in order to reduce the negatives
- they could subsidies private firms to shift supply so that is equals demand
- they could also provide there own good/service to increase supply to Qd
but with these’s come a huge oppurtinity cost to correct an issue the goverment has created
How are resources distributed at a free market equilibrium
at a free market equilibrium there is an efficent allocation of scare resources
what are private costs
a producers cost of production (gas, electricty, wages)
what is meant by the marginal private cost
the cost to firms of producting just one more unit of G/S
what are social costs
private costs + external costs
what are external costs
any impacrs on third partys that are not involved in the transaction
these can be either negative or positive
what do we assume about social costs and social benefits in a free market that is allocatively efficent
we assume that there are no external costs or external benefits
what are private benefits & MPB
individual consumer benefit upon consumption of a good/service
marginal private benefits are the benefit that a consumer gets upon consumption of just another one unit
what are external benefits
any impact on third partys as a result of consumption
this impact could be positive or negative
what things will be maximised as allocative efficency is occuring
- maximisation of socitey surplus (producer + consumer suprlus)
- maximisation of net social benefit
What is society surplus
consumer surplus + producer surplus
Where does maximisation of society surplus occur
where demand = supply
Where does maximisation of net social benefit take place
- MSB = MSC
- marginal social benefit = marginal social cost
at which point do resources perfectly follow consumer demand
demand = supply
where would you find the private optimum and what is it also referred to
- MPC (S) = MPB (D)
- marginal pirvate cost = marginal private benefit
- also called market equilibrium
- ^allocative efficency
what assumptions needs to be made about a free market equilibrium for there to be allocative efficency
- many buyers and sellers
- perfect information (for both producers and consumers)
- no barriers to entry/exit
- firms are profit maximisers
- consumers are utility maximisers
same as perfectly competative
what is the social optimum
MSC = MSB
it is allocative efficency
when do market failures occur
when the free market fails to allocate scare resources at the socially optimum level of output
what are positive externalites
postive impacts on third partys due to the action of a seperate agent consuming a good/service
what are negative externalites
costs to third parties as a result of the actions of a seperate agent producing a good/service
How can positive and negative externalites be a source of market failure, and how
consumers will ignore impacts on third partys when they consume, firms will ignore any impacts on third parties when they produce because firms are profit maximisers that only consider their private costs, consumers are utility maximisers that only consider their private benefit
self intrest is at the heart of the problem which is why is it a market failure
How can merit and de-merit goods be a source of market failure
we dont fully know how good or bad these goods are
there is inperfect information/infomation failure which could make consumers make irrational decisions
this could lead to the allocation of scare resources being to high or to low
How can public goods be a source of market failure
the market failure is the free rider problem and the notion that firms are profit motivated and so there will be no public goods left in the long term
how can common access resources (tradegy of the commons) be a source of market failure
the market failure is self-intrest, this is brought about because common access resources will often be over-produced and over-consumed, producers will ignore external costs when producing
what is the market failure brought about by income inequality
inequity is the market failure that could be brought about by income inequality, this is down to opinion on when income inequality becomes to high
what is meant by equity in economics
fairness
How can be monopoly power be a source of market failure
- would be one dominant seller & high barriers to entry, low variety
- consumers can be exploited by high prices and low quantites
- allocative inefficency
How could factor immobility be a source of market failure
if there is an increase in demand, suppliers would want to respond by producing extra output, producers wont be able to produce extra output if factors of production are immobile, this would cause a misallocation of resources
what is negative externalities of production, what are some examples
costs to third partys as a of the actions of a producers
air pollution, resource depletion, resource degradation, deforestation, desertification
what is meant by third parties in economics
individuals or economic agents who have got nothing to do with the activity/transaction taking place
On a diagram how do we show the impact of negative externalitites of production
MSC>MPC