MICRO: Markets and Economies Flashcards
What are markets?
Markets are a way of allocating resources. They don’t have to be a place, or involve the exchange of physical objects.
What happens in a market?
Each buyer or seller in a market chooses to exchange something they have for something they’d prefer to have instead. For example, someone’s labour (their ‘work’) is a resource.
Since everyone is considered to be rational in a free market, what do economists assume?
- The worker would prefer to have their wages, but less free time.
- The employer would prefer to have less money, and to know that there’s someone there do some work.
What is a free market?
They allocate resources based on supply and demand and the price mechanism. Anything can be sold at any price that people will pay for it.
What are the pros of a free market economy?
- Efficiency - only products of the best value will be in demand. Firms have an incentive to try and be as cost efficient as possible.
- Entrepreneurship - In a market economy, the rewards for good ideas (e.g. new, better products) can make entrepreneurs a lot of money, encouraging risk taking and innovation.
- Choice - incentives for innovation can lead to an increase in choice for consumers. (And in a free market, consumers aren’t restricted to buying only what the govt recommends).
What are the cons of a free market economy?
- Inequalities - market economies can lead to huge differences in income - since many people think large differences are unfair. And in a completely free market, anyone who’s unable to work would receive no income.
- Non-profitable goods may not be made - E.g drugs to treat rare medical conditions may never sell enough to make profits, so they’re not made.
- Monopolies - successful businesses can become the only supplier of a product - this market dominance can be abused.
What is a command economy?
The government decides resource allocation. They were more common in the late 20th century (former USSR). Some countries still have command economies , such as North Korea
Pros of a command economy
- Maximise welfare - governments have more control over the economy, so they can prevent inequality and redistribute income fairly. They can also ensures the production of goods that people need and are beneficial to society.
- Low unemployment - the government can try to provide everyone with a job and a salary
- Prevent monopolies - market dominance of monopolies can be prevented by the government.
What are the cons of a command economy?
- Poor decision making - Lack of info means govts may make poor and slow decisions about what needs to be produced.
- Restricted choice - consumers have a limited choice in what they can consume, and firms will make what they’re told to make.
- Lack of risk-taking and efficiency - govt-owned firms have no incentive to increase efficiency, take risks or innovate, because they don’t need to make profit.
What is a mixed economy?
Govt and markets both play a part in allocating resources
When does market failure happen?
Market failure happens when free markets result in undesirable outcomes - e.g traffic congestion is seen as a market failure
How do governments intervene in market failure?
Govts can:
- Change the law, or offer tax breaks (e.g reduce taxes for anyone carrying out particular activities), or create some other kind for incentive to try to influence people’s behaviour.
- They can also buy or provide goods and services.
In a mixed economy, there is a public and private sector. Describe what both of them are.
- The govt is known as the public sector. - - Businesses that are privately owned make up the private sector.
- Private-sector organisations usually have to break-even to survive.
In a pure free market economy, is there no public sector?
No.
In a pure command economy, there would be no private sector. True or False.
False.
