Market Failure

Question 1

What is Market failure?

Answer 1

Market failure is when the price mechanism leads to a misallocation of resources

Question 2

What are the 4 factors affecting market failure?

Answer 2

1) Negative externalities
2) Positive externalities
3) Public goods
4) Information gaps

Question 3

Marginal Utility

Answer 3

The additional utility from consuming an extra unit

Question 4

Total utility

Answer 4

Is the total utility from consuming all units

Question 5

What happens as more units are consumed?

Answer 5

Marginal utility decreases whereas total utility increases.

Question 6

What is Diminishing Marginal Utility?

Answer 6

Diminishing marginal utility says as you consume more of a good, the additional utility gained will decrease.

Question 7

What will a rational consumer aim to do? (utility)

Answer 7

A rational consumer aims to maximise their utility.

Question 8

Rational Decision Making

Answer 8

A consumer behaves rationally if they make decisions which maximise their own utility.

Question 9

Utility

Answer 9

The satisfaction from consuming a good/service.

Question 10

Irrational consumers

Answer 10

1) Bounded rationality
2) Bound self-control
3) Altruism
4) Social norms

Question 11

Bounded rationality

Answer 11

We have limited mental processing which can make it difficult to factor in all decisions

Question 12

Bounded self-control

Answer 12

Our limited ability to control ourselves

Question 13

Altruism

Answer 13

This is when we care about the utility of other people