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Zak copy econ > Micro year 1 (part 3) > Flashcards

Micro year 1 (part 3) Flashcards

1
Q

What market failure is property rights most often used to fix

A

Tradegy of the commons related market failure

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2
Q

How do property rights actualy work to fix marker failures

A
  • onwer of common access resource has incentive not to over expoloit land
  • negative externalitie market failure internalised
  • trespassers can be sued
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3
Q

what are some issues with using property rights in order to solve market failures

A
  • hard to efficently distribute to firms
  • enforcement is needed otherwise scheme breaks down
  • Equity, who gets the right of ownership
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4
Q

write down the features of a market economy

A
  • ownership: private
  • Motive: Profit maximisation
  • Freedom of choice: High
  • Competition: High
  • Role of goverment: Low
  • Variety and quality of goods/services: High
  • Response to demand: Quick
  • Efficency: Allocative efficency, with some inefficency
  • Merit goods: under provided
  • Demerit goods: Over provided
  • Public goods: missing markets
  • Income distribution: Unequal
  • Monopolies: Yes, they can exist
  • Real world: No pure but USA and singapore very market orientated
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5
Q

write down the features of a command economy

A
  • Ownership: Public
  • Motive: Welfare motivated
  • Freedom of choice: Low
  • Competetion: Low
  • Role of goverment: High
  • Variety and quality of G/S: Low
  • Shortage/surplus: yes, as no pricing mechanisms
  • Merit goods: social optimum
  • Demerit goods: social optimum
  • Public goods: Allocated
  • Income distribution: Equal
  • Negative externalites: Social optimum
  • Monopolies: None
  • Real world: No pure command economys but countires like north korea and cuba are heavily command based
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6
Q

write down the features of a mixed economy

A
  • Ownership: Public and private
  • Motive: public-welfare maximisers, Private profit maximisers
  • Freedom of choice: Pub-no, Pri-Yes
  • Competetion: Pub-no, Pri-yes
  • Role of goverment: Limited role, intervene when necessary
  • Variety and quality of goods/services: Pub-low&low, Pri-High&HIgh
  • Response to demand: Pub-slow, Pri-quick
  • Efficency: Total efficency max
  • Shortage/surplus: Pub-yes, Pri-no
  • Merit goods: Goverment intervention
  • Demerit goods: Goverment intervention
  • Public goods: goverment intervention
  • Income distribution: Progressive tax and welfare state
  • Negative externalites: Goverment intervention
  • Monopolies: Goverment intervention
  • Real world: Majority of economies
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7
Q

What is a free market

A

Any place where buyers meet sellers to exchange goods and services, free from goverment intervention

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8
Q

what occurs at equilibrium in a free market, and how does it occur

A

Allocative efficency occurs at equilibirum,
- Resources perfectly follow consumer demand
- society surplus is maximised (the sum of producer and consumer surplus)
- Net social benefit is maximised (marginal social benefit=marginal social cost at equilibirum)

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9
Q

what are some pros of the free market

A
  • Allocative efficency at equilibirum,
  • Encourage competition, if a free market works well it can be highly competative
  • High Dynamic efficency
  • Job creation and economic growth is high
  • Freedom, liberty, choice
  • No risk of goverment failure
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10
Q

How are jobs created and how does economic growth come about from a free market

A
  • In a free market quantity is at its maximum level and so due to labour being a derived demand you are going to see more job creation as more goods/services need to be produced
  • Because quantity is high throughout the economy and the market is very competative you are going to see high quantitys being produced by every market in the economy and so real GDP is going to be driven up which would lead to economic growth
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11
Q

Why is dynamic efficency a pro of a free market and how does it come about

A
  • In a highly competatative market your going to have a high level of dynamic efficency, this leads to reinvestment back into the business, such as investing in technology, R&D, Capital machinery upgrades.
  • This is good news for consumers because we get brand new innovative goods/services with new technology.
  • Overtime prices would fall because costs are lower for firms due to the technology advancement
  • Quantity, quality, choice all improve
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12
Q

Why is allocative efficency a pro of a free market

A
  • Left to free market forces, at equilibrium there will be allocative efficency
  • You will never get long run disequilibirums because of the rationing, signalling, incentive functions of price means that any excess demand and excess supply will simply not exist
  • ^This is good because shortages are major burdens on consumers and surpluses are massive burdens on firms and you wont get them
  • Consumers will get exactly the quantity og goods/services they desire at whatever the market price is
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13
Q

Why is encouraging competition a pro of the free market

A
  • In a highly competative market firms with be trying to keep their costs as low as possible and be passing these low costs onto consumers via lower prices
  • In a highly competative market consumer surplus is high
  • quantity is high, choice is high, quality is high all because firms are competing with eachother and to be most competative they must be giving consumers what they want
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14
Q

Why is freedom, liberity and choice a pro of a free market

A
  • Individuals are free to live their life however they want to, they can consume the goods and services they want to with out being coersed and force into doing things the goverment says
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15
Q

Why is no goverment intervention a pro of free markets

A
  • Without goverment intervention you will not be getting the costs of intervention and the risks of goverment failure
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16
Q

What are some cons of the free market

A
  • Market can fail
  • price may exclude people even though its efficent
  • Excessive profitering
  • Creative destruction
  • Price volatility
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17
Q

Why is market fail a con of a free market and how can it come about

A
  • allocative efficency not guarrented
  • we assume competitive outcome, but could oligopoly or monopoly (we dont get competive benefits)
  • what if info gaps in market, lead to irrational desicons
  • if firms profit maximisers, loss making services (public goods) not allocated, externalities ignored
  • consumers may ignore consumption based externalites
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18
Q

How is inequity given inequality a con of the free market and how can it come about

A
  • the price at equilibirum may be a very efficent price but it may exclude a lot of consumers from accessing the market, if this good/service is a necessity you could argue it is not right on the ground of equity
19
Q

How is excessive profitering a con of the free market and how can it come about

A
  • making profit in ways that society deem wrong,
    ^cost cutting in dangerous areas
    ^prices way above costs
  • negative impact on society
  • long term harm to firm reputation
  • exploitation of consumers via exploiting market power or deceptive practices
20
Q

How is creative destruction a con of the free market and how can it come about

A
  • In free markets there is a lot of movement into the market of firms in search of profit, when firms do enter they often enter creativly usually via innovation or a lower cost of production way of producing, this creativity can destory pre-existing firms in the market that now cant compete which could lead to higher rates of unemployment
21
Q

How is Price volatility a con of the free market and how can it come about

A
  • price can be highly volatile especially in commodity and agricultural markets where depend and supply are both highly price inelastic, they shift a lot
  • When prices go up there is a heavy burden on consumers
  • when prices go down there is a heavy burden on producers
22
Q

what is specalisation

A

The concentration of production on a narrow range of goods or services

23
Q

what is division of labour

A

Breaking down the production process into seperate tasks upon specalisation

24
Q

what are the advantages of specalisation

A
  • higher out put (maximisation of output)
  • wider range of goods/services
  • Greater allocative efficency
  • Higher productivity through better use of workers
  • Quality improvements
25
Q

Why is higher output a advantange of specalisation

A
  • for specalisation to work there must be mutually benefical trade, so if a country specalises in only a few goods/services they need to be able to import other goods/services they are not efficent at producing, they also need to be able to export the goods/services they are efficent at producing
  • This could mean a rise in both export revenue (trade in general) and economic growth can rise
  • There are greater living standards, choice for consumers and more job oppurtunitys as well
26
Q

How can we get greater allocative efficeny from specalisation of firms/countries and why is it good

A
  • allows firms to focus resources to what produce most efficently
    ^improved skills/efficiency in tasks
    ^lower costs per unit
  • can produce more at lower costs(therefore lower price) so can supply quantity demanded
27
Q

What are some issues that come with over specalisation of firms/countries

A
  • finite resources (production may require certain resources)
  • changes in fashion/tastes
  • de-industrialisation (stopping manufacturing)
  • national independence (not trading)
28
Q

How is finite resources a disadvantage of specalisation

A
  • if a over-specalised country or region needed a certain good in their production what will happen if this finite resource runs out, it could mean the end of the producer
29
Q

How are changes in fashion/taste a disadvantage of specalisation

A
  • if a business if over-specalised in one area and then that good/service is no longer in demand what will happen to them, they could collapse
30
Q

How is de-industrialisation a disadvantage of specalisation

A
  • if there are 2 producers that are specalised in manufacturing a product, what will happen to the other producer if one of them becomes more specalised in the production, it will begin to break down and de-industrialisation will take place which could lead to high levels of unemployment
31
Q

How is national independence a disadvantage of specalisation

A
  • for specalisation to work there must be mutually benefical trade, countires need to be able to export their surplus and import goods/services they are not specalised in
  • if international relations between countries breaks down the benefits of specalisation will not be present
32
Q

What are the advantages of division of labour

A
  • workers are going to be highly productive
  • specalist capital for workers
  • Lower prices, higher quantity, choice and quality of goods for consumers
33
Q

Why is high productivity of workers a benefit of division of labour

A
  • high productivity could drive up wages
  • For the firms it would be time saving, it would lower costs of production, which could mean lower prices for consumers
  • Output is going to be maximised
  • profitablity is going to be higher for the firm as well
34
Q

What are some disadvantages of divison of labour

A
  • demotivation of workers (performing same tasks over and over again)
  • High worker turnover
  • Risk of long term unemployment
  • Highly standardised goods/services
35
Q

Why is demotivation of workers a disadvantage of division of labour

A
  • productivty over time could decrease, cost of production rise
  • Workers could leave the busines
36
Q

how can division of labour lead to long term unemployment

A
  • over specalisation limits workers skills
    ^ if tech advances job could done my machine
  • lead to LR unemployment as workers with highly specalised skills struggle to find new work
37
Q

Why is highly standardised goods/services a disadvantage of division of labour

A
  • with such division of labour and such specalisation of workers you could end up with highly stabdardised goods/services (factory made gods/services) you lose the unique touch that often consumers like to see
38
Q

Why is demand so price inelastic for primary commodities

A
  • Many primary commoditeis are necessitys
  • There is a lack of good substituets
39
Q

Why is supply so price inelastic for primary commodities

A
  • There is a lrage production lag (e.g. you cant grow crops over night)
  • Hard to store many of these commodities, low stocks
40
Q

What are the consequences of price volaltility of primary commodities

A
  • if price increase producers will be very happy because there revenue will rise, there living standards will rise
  • If price falls then producers total revenue will decrease as well as there income, profitablilty and living standards, they might even go out of busines completely
    ^this could lead to supply concerns such as shortages
  • The revenue from primary commodities often provide a large amount of goverment revenue through taxation or goverment shares in the businesses and so goverment revenue could decrease
    ^export revenues could also decrease which could lead to less economis growth
  • Price volatility could put producers off of investing which could lead to costs of productions staying higher and competativeness falling over time
41
Q

what is a social science

A

Observations of human behaviour, and then theorys are made to explain them

42
Q

what is the structure of a 25 marker

A
  • KAAEKAA ultimately EAA x2
  • judgement
43
Q

Why are the prices for primary commodities so volatile

A
  • the demand and supply are very price inelastic
  • There are regular shifts of the demand (heavily influenced by global growth, if high there will be a huge demand but if low there will be a low demand) and supply (such as changes in weather especially for argiculture) curves in the market
  • Due to the combination of the 2 there can be massive fluccuations in price

Zak copy econ (7 decks)

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