Microeconomics Flashcards
(113 cards)
1
Q
Demand definition
A
The quantity of goods and services that consumers are able and willing to buy at any given price point.
2
Q
What 2 reasons mean that as prices go up demand falls?
A
Income effect- Purchasing power of income goes down so able to consume less products
Substitution effect:
3
Q
What are the determinants of demand?
A
Population- more demand , Advertising , Substitute price, income, Fashion/tastes, Interest rates, complements price.
4
Q
what is the law of supply?
A
As price increases quantity supplied increases. This is because of the profit motive.
5
Q
Determinants of supply?
A
Determined by increases or decreases in cost of production Productivity, Indirect Tax, No. of firms, Technology, subsidy, Weather, Costs of production.
6
Q
where does equilibrium occur?
A
Where demand= supply
7
Q
What are the 4 functions of the self correcting mechanism?
A
ARSI- allocates scarce resources, rations excess supply/ demand,
8
Q
Why is supply more inelastic in the short-run and more elastic in the long run?
A
Because in the short run, at least one factor of production is fixed usually capital as firms can employ more labour and buy more materials but not more facilities as takes time.
In the long run, all factors of production are variable so able to increase its capacity so able to react to changes in price and demand.
9
Q
What are the 3 functions of the price mechanism?
A
Acts as an incentive for firms-hugher prices encoirage more production
signalling device changes in price show chanes in demand and supply signalling to frims and idiuviduals eg. if demand is high it signals for firms to produced more.
Acts to ration scarce resources- if there’s high demand for a good or service and its supply is limited than then the price will restrict buyers to only those who can afford it.
10
Q
What are the advantages of the price mechanism?
A
> Resources are efficiently allocated to satisfy consumer wants and needs.
> Price mechanism can operate without the cost of employing people to regulate it.
> Consumers decide production by producers
> Prices are kept to min as resources are used as efficiently as possible
11
Q
What are the disadvantages of the price mechanism?
A
> Income & wealth inequality more likely
> Underprovision of merit goods and over-provision of demerit goods
> People with low mrp will suffer from unemployment and receive low wages
> Public goods aren’t produced
12
Q
What is consumer surplus?
A
> Difference between the price that a consumer is willing to pay for a good with the price they actually pay.
13
Q
what is producer surplus?
A
> difference between the price a producer is willing to supply at versus the price they actually receive for it.
14
Q
What factor effect the demand for oil?
A
The demand for crude oil as oil is in derived demand. The strength of the US ER, oil sold in dollar so lower dollar means speculators with more currency can buy more of it, the attractiveness of buy oil substitutes
15
Q
What factor effect the demand for oil?
A
The demand for crude oil as oil is in derived demand. The strength of the US ER, oil sold in dollar so lower dollar means speculators with more currency can buy more of it, the attractiveness of buy oil substitutes, cold conditions mean more oil is needed and as middle class increases demand for oil increases.
16
Q
what factors affect the supply for oil?
A
OPEC if they choose to restrict supply then prices will increase and if there are supply side shocks such as war of natural disaster.
17
Q
What affects the price of houses?
A
The number of houses built and supplied, the demand for houses this depends on cost of taking out a mortgage, the level in the economic cycle (high consumer confidence in a boom), cost of renting as it is a substitute but also reduces supply, area of the UK in south east houses are more desirable and demanded.
18
Q
What is production?
A
Production involves turning an input into an output. An input can be any of the 4 factors of production and involves turning it into a product with an exchangeable value.
19
Q
What is productivity?
A
A way of measuring how efficiently a companies is producing its output, output per unit of input employed, improving output from one input/ factor of production should increase total productivity as its calculated from total output from all inputs.
20
Q
What are the advantages to specialization?
A
> People can specialize in the things they are best at this can lead to improvement in quality and higher quantity of goods for the same amount of effort.
> specialization is one way in which firms can achieve economies of scale. i.e.. a production line.
> specialization leads to more efficient production- helping tackled scarcity problem as resources are being used more efficiently.
> training costs reduced as less training, only needed for one skill.
21
Q
What are the disadvantages of specialisation?
A
> Workers doing repetitive tasks can create boredom
> country’s can become less self sufficient as they may specialise to only one sector and become import reliant on fuel leaving them susceptible to aa supply shock affecting the economy.
> can also lead to a lack of flexibility where companies struggle to adapt and leave the UK
22
Q
What are the 3 functions of money?
A
> measure of value - value given to a good ie oil
> a store of value - ie. individual who receives wage may wait before buying something if they know money will be of similar value in the future.
> a standard of deferred payment- money can be payed later for something that is consumed now . uni loans
23
Q
How is economic cost measured?
A
Takes into account the monetary cost as well as the op cost.
24
Q
What is the marginal cost?
A
The cost of producing one more unit of output.
25
Where is productive efficiency?
At lowest point of AC where MC intersects it at MC=AC, this is the pint in which costs are minimized as the additional cost of each unit is equal to the gain in average cost.
26
What is the law of diminishing returns?
If one variable factor of production increases while the other stay fixed the marginal returns from a factor begin to decrease.
27
the steps of diminishing returns?
>initially as you add more factors of production the MP increases, this may be because of more specialization occurring however as you keep adding factors of production eventually MP starts to decrease as other fixed factors limit production i.e. 5 sewing machines may allow for MP TO INCREASE UP TO THE 5TH LABOURER BUT AS THE 6TH aND 7TH LABOURER IS ADDED THE MP gained begins to fall this is the point of diminishing marginal returns which increases the marginal cost.
28
What are the 6 aspects of internal economies of scale?
Really Fun Moms Try to Make Pies
R-Risk-bearing- larger firms can diversify into more markets and take more risks as well as afford to take more risks in quirky products as the can more easily absorb the costs of failure.
F-financial-larger firms can borrow more money at a lower rate of interest as are seen as less risky.
M-Managerial - large firms will be able to employ specialist managers to take care of different areas of the business with specific expertise leading to better decision making in certain areas.
T-Technical- production line methods reducing costs and specialization of labor with more specialised equipment and workers can specialize. Also, law of increasing dimensions where pound spend to increase a warehouse by 1 m leads to a greater than proportional increase.
M-Marketing- Advertising is a fixed cost spread over more units for a large firm so the cost of advertising is lower as can advertise Mutiple products at once, they also benefit from increase brand awareness so have to advertise less in order to make sales.
P-purchasing- bulk buying as can negotiate discounts as firm will be most important costumer to supplier so can drive a hard bargain.
29
What are some examples of external economies of scale?
>local colleges offering qualifications needed by big employees.
>Large companies locating in an area may lead to improvement in road networks or local public transport.
>lots of firms doing similar things may be able to share resources and suppliers may also locate near them reducing transport costs.
30
What are some examples of internal diseconomies of scale?
>wastage and loss can increase, as materials seem plentiful in supply with things being lost.
>communication becomes more difficult disrupting employee's morale.
>managers have less control over the production process.
>Difficult to coordinate activities between divisions and departments.
>Them and us attitude can develop between workers in one part of the firm and the other side leading to less cooperation and thus efficiency.
31
Examples of external diseconomies of scale?
As whole industry becomes bigger the price of raw materials may increase.
>buying large amounts of materials may not make them less expensive per unit if local supplies are insufficient larger travel costs may have to be incurred in order to gain the right amnopubt of raw materials .
32
Examples of external economies of scale?
As whole industry becomes bigger the price of raw materials may increase.
>buying large amounts of materials may not make them less expensive per unit if local supplies are insufficient larger travel costs may have to be incurred in order to gain the right amnopubt of raw materials .
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33
What are increasing returns to scale, constant returns to scale and decreasing returns to scale?
Increasing returns to scale- are when an increase in factor inputs leads to a more than proportionate increase in output.
Constant returns to scale are when an increase in all factor inputs lead to a proportional increase in output.
Decreasing returns to scale is when an increase all factors of production lead to a less than proportionate increase in output.
34
What is the minimum efficient scale?
MES is the lowest level of output at which the minimum possible average cost can be achieved, there is likely to be range of output levels where LRAC are minimized.
35
Why does a price taker have a perfectly elastic demand curve?
Has to accept the market price, demand is perfectly elastic as if fir increases price demand drops to zero and if it lowers the price they'll sell the good at the same quantity will a lower price point.
36
Why does AR= MR in a perfectly elastic demand curve?
Because with each extra unit sold brings in the same revenue as all the others.
37
What is normal profit?
Where total economic costs =total revenue, if revenue left over after equal to opportunity cost then its the min profit to carry on operating in with resources in the long term.
38
What is supernormal profit?
A firm makes supernormal profit when TR is greater than total costs.
39
Why is profit maximised at point MR=MC ?
MR=MC, this is because its the point where each additional unit of output equals the cost to produce that unit of output.
40
Where is revenue maximised ?
At the point where MR equals zero as they will keep adding to the output past the point profit is maximised to a point where revenue is no longer gained.
41
where are sales maximised ?
Where AR=AC as this is the highest level of output that a firm can sustain in the long run any lower and a loss would be made.
42
Why might profit maximising only be an objective for the long run?
Means sacrificing profit in the short run, a firm may try and to maximise sales or revenue in the short run to increase market share/ gain monopoly power in order to earn supernormal profits in the long run. some firms may expect to make a loss until they able to have output at higher production levels and experience economies of scale or they may be aiming to survive in the market and focusing on maximising profits if they survive in the long term.
43
What alternate objectives do some firms have?
Some firms aims aren't motivated solely due to profit, some are not for profit organisations which main aim is to do good for the public other firms will aim to of producing high quality products at expense of maximising profits in the short term to gain loyal consumers in the short term.
Many firm's aim for CSR corporate social responsibility acting in way to bring benefit to society i.e. by using sustainable resources, supporting local businesses using local suppliers and paying employees above the standard market wage.
44
What is the divorce of ownership and control?
Idea of directors having differing objectives to the owners of the firm with all stakeholders potentially having differing objectives. Divorce of ownership and control can lead to the principle agent problem
> where principle (shareholders) ay for agent (managing director) to act in their interests by agent acts in self interest. i.e. if firm shareholders want to maximise profit but managing director pay is linked to revenue or sales than they may want to maximise those things instead.
> Directors also may want to see the firm grow and flourish as they enjoy running organisation and it will help further them in their career, employees are also likely to aim for wage increases instead of bettering the firm.
45
How can the principle agent problem be dealt with?
By holding owners accountable and voting to remove them but often lack information to do this and have other incentives encouraging profit maximization perhaps by giving them company shares or a dividend of the profit.
Corporate governance with bunch of overseeing directors
46
What is satisficing?
>Doing just enough to satisfy all important stakeholders instead of maximising profits
>satisficing often occurs with differing objectives between stakeholders
> instead of maximizing profits they may aim to earn enough profits and give their workers high wages to stop them going on strike.
47
What are the benefits of growth?
>increasing EOS
>increasing market share and reduced competition
>Expanding into new markets
48
What is internal growth?
>Growth as a result of a frim increasing the levels of the factors of production it uses. E.g. increasing output by building a larger factory, hiring more workers and buying more raw materials.
>Key adv of internal growth is that firm has total control
>however downside is that t can be slow and expensive.
49
What is external growth?
Result of takeovers and mergers
- takeover is when a firm buys another firm
-merger when 2 firms form 1 firm
External growth is quicker and cheaper than internal also allows experience and expertise to be gained in a new area of business.
External growth can also be obtained in vertical and horizontal integration and conglomerate integration.
50
What is horizontal intergration?
Involves the combining of firms in the same stage of the production process producing similar products i.e. 2 pharmaceutical companies. This can increase EOS and market share
51
What is vertical integration?
Combining firms at different stages of the production process for the same product.
>Forward vertical integration happens when a firm takes over a firm that is further forward in the production process
>backward vertical integration involves taking over a firm that is further back.
>by taking over suppliers/retailers firms can gain control of the whole production line making it more efficient, this also creates barriers to entry.
52
What is conglomerate integration?
Means combing firms which operate in different markets allowing diversification spreading risk as well as allowing for cross subsidisation.
53
What are the disadvantages of growth?
>When 2 firms merge there will be duplication of staff and as a result some will be made redundant i.e. in marketing
>these merged firms also may have conflicting ideas
>a firm can also put itself in lots of debt in order to raise the necessary finance.
> additionally diseconomies of scale could occur.
>And frim may overestimate value of firm they are taking over and overpay making it hard to make a return on investment.
54
what are the advantages and disadvantages of growth for consumers.
Larger firm may benefit from EoS leading to price reductions, combined creativity of 2 firms working together may lead to production of superior products.
Disadv: consumers will have less choice if 2 or more firms merge, reduction in competition may lead to higher prices for consumers, 2 merged firms may lead to reduced output, raising prices.
55
What is a demerger?
Where a frim breaks up into smaller firms trough selling it off to improve business performance, pay off loans , reduced dis Eos, in repose to the threat of gov intervention.
56
Why do some firms choose to stay small?
In order to have a more personal experience, to stay focused and efficient, to have more flexibility as well as owners may not want the extra work involved and may want to stay eco-friendly.
Some also remain small as its a niche market with limited demand, unable to receive sufficient loans and lack the skill from owners to expand.
57
What are the characteristics of a perfectly competitive market?
>Infinite number of suppliers and consumers
small firms
>Perfect information - knowledge about every firm, price and product
>Homogenous goods-so all firms are perfect substitutes
>No barriers to entry/exit
>Firms are profit maximisers - MC=MR
>price takers
58
How does perfect competition lead to allocative efficiency?
In perfect competition demand curve= marginal utility because consumers demand and preferences reflect what the good is worth to them and AE occurs when a goods price is equal to what consumers want to pay for it , happens as price mechanism ensures price is according to consumer preferences at P=MC
However this assumes there are no externalities as if there are then mpc
59
Why does supernormal profit not exist in a perfectly competitive firm?
This is because say there's high demand for the goods in a perfectly competitive firm causing price to rise above AC the supernormal profit will create an incentive for new firms to join the market as supernormal profit acts as a signal due to perfect info and no barriers to entry/exit it means that supply immediately increases lowering the price and eroding supernormal profit.
60
what causes a firm to leave the market?
If its average revenue is below the level of firms average variable costs the firm will leave the market immediately.
61
When is a firm said to be productively efficient?
PE comes from firms trying to maximise their profits. Thus a firm produces at MC=MR, frim in perfect competition will produce at the lowest possible cost level as there is strong incentive to keep level of X-inefficiency as low as possible to maximise profits.
62
Why aren't perfectly competitive firms dynamically efficient?
Only earn normal profit so there is no incentive and no reward in taking risks.
63
What determines how long an incumbent firm can make profit for?
>The height of the barrier to entry- how long these barriers can prevent new firms from entering the market
>the level of supernormal profit determines the degree to which new firms will be willing to overcome these barriers
>Whether new entrants can successfully join the market at all
64
what barriers to entry can arise as a result of the incumbent firm?
>An innovative new product or service can give a firm a headstart over over rivals and can be patented
>strong branding can mean some products are very well known to consumers. The familiarity of the product often makes it a
consumers first choice
>Strong brand as a result of high quality goods or and advertising, barrier is expense to attract consumers over rivals
>Aggressive price tactics through limit and predatory pricing
>threat of price war can deter new firms from entering the market
65
Which barriers to entry arise due to the nature of the industry?
Some capital intensive industries require huge investments in capital expenditure before a firm receives any revenue. So the initial cost is huge.
>if the market has lots of sunk costs than the market is seen as risky and unappealing.
>If there's a minimum efficient scale of production than any firms entering the industry on a smaller scale will be operating at a higher point on the average cost curve. Meaning the entrant will have a higher price than competitors.
66
Which barriers to entry are caused by government regulations?
If an activity requires a license then this restricts the number and speed of entry of new firms eg dentists require licenses to enter the market. Similarly regulated industries have to be approved by a regulator before carrying out certain activities.
67
Which barriers to entry are caused by government regulations?
If an activity requires a license then this restricts the number and speed of entry of new firms eg dentists require licenses to enter the market. Similarly regulated industries have to be approved by a regulator before carrying out certain activities.
68
Which barriers to entry are caused by government regulations?
If an activity requires a license then this restricts the number and speed of entry of new firms eg dentists require licenses to enter the market. Similarly regulated industries have to be approved by a regulator before carrying out certain activities.
69
Which barriers to entry are caused by government regulations?
If an activity requires a license then this restricts the number and speed of entry of new firms eg dentists require licenses to enter the market. Similarly regulated industries have to be approved by a regulator before carrying out certain activities.
70
Which barriers to entry are caused by government regulations?
If an activity requires a license then this restricts the number and speed of entry of new firms eg dentists require licenses to enter the market. Similarly regulated industries have to be approved by a regulator before carrying out certain activities (banking).
>new factories may need planning permission before they are built
>There will also be health and safety regulations.
71
What are the characteristics of a monopoly?
> Large barriers to entry
> Advertising and product differentiation
> Few competitors in the market
>Price makers
>imperfect info
72
Why aren't monopolies not productively or allocatively efficient?
MC isn't equal to AC so therefore the firm isn't producing at its lowest point of AC so isn't productively efficient on top of this price charged by firm is greater than MC so meaning that the monopoly market isn't allocatively efficient producers are being overrewarded for their products, because of the restricted supply the product will be under consumed .
73
why do natural monopolies have more monopoly power?
Industries where there are high fixed costs and large EoS that lead to natural monopolies, if there was more than one firm in the industry than all firms would have high fixed costs leading to higher costs per customer than with one firm. In this case a monopoly may be more efficient than having lots of firms competing.
Natural monopoly has continuous economies of scale as LRAC always falls as output increases, gov reluctant to break up a monopoly as could lead to a reduction in efficiency, gov may supply subsidies to in need firms.
74
What are the benefits of a monopoly?
Large size helps it gain advantage of economies of scale. If diseconomies of scale are avoided, this means it can keep average costs low and maybe prices.
>security a monopoly has in the market as well as means for supernormal profit means that it can take a long term approach in developing and improving products for the future.
>Increase financial security can mean a monopolist can provide stable employment for its workers.
>Intellectual property rights allow a form of legal limited monopoly that can actually that help form innovative products
> monopoly reward for innovation and creativity
>Without protection incentive to innovate would be limited as supernormal profits would be eroded.
75
What is a concentration ratio?
The level of domination by different firms
76
What is a concentration ratio?
The level of domination by different firms
77
What is an oligopoly?
A market that's dominated by just a few firms with high conc ratio with high barriers to entry in which firms offer differentiated goods, these firms are interdependent- i.e.. actions of one firm has an effect on the other. These firms can use competitive or collusive strategies.
78
In what ways do oligopolies aim to maximise their profits?
Through competitive behavior when various firms don't cooperate but compete with each other (mainly on price) it is more likely when one firm has lower costs than the other and there's a large number of firms in the market producing similar products with low barriers to entry.
79
In what ways do oligopolies aim to maximise their profits?
Through competitive behavior when various firms don't cooperate but compete with each other (mainly on price) - more likely when one firm has lower costs than the other and there's a large number of firms in the market producing similar products with low barriers to entry.
Or through collusive behavior where firms cooperate with each other over what prices are charged this can either be formal involving an agreement- illegal
or informal which is tacit happening without any kind of agreement happens where firms know is in their best interests to not compete some firms in a collusive oligopoly act as price leaders setting patterns for others to follow.
Collusive behavior is more likely when all firms have similar costs with relatively few firms in the market and high brand loyalty and barriers to entry.
80
How do colluding firms compete?
Non-price competition by aiming to differentiate products from competitors by improving them creating a strong brand and through sales promotions as well as through finding new export markets. New firms that enter the market are often colluded against in predatory pricing.
81
WWhat are the advantages to an oligopoly?
Formal collusion is argued unlikely to happen as it is illegal and an informal collusion is likely to be temporary as one firm will cheat and lower its prices to gain an advantage leading to a price war.
Additionally even if a collusive oligopoly isn't competiting on price non price competition likely to lead to dynamic efficiency leading to innovation and improvements firms are also unlikely to raise the price to a high level as high prices are likely to attract new firms
82
What are the 2 assumptions of the kinked demand curve?
If one firm raises their prices the other frim will not raise theirs this is because when prices increase demand is elastic so demand will fall more than the gain in profit. The 2nd assumption is that if one firm lowers their price all other firms will also lower theirs as demand is inelastic with lower prices and no major increase in market share. Resulting in price stability at MC=MR.
83
What are the disadvantages the kinked demand curve?
only shows one type of interdependance, doesn't explain the behavior of firms in every oligopoly.
84
What are the features of monopolistic competition?
>some product differentiation- due to advertising and real dfferences between products.
>means eller has some price making ability, sellers demand curve slopes downwards, no or low barriers to entry, good information.
85
Monopolistic competition vs perfect competition?
In the short run resembles a monopoly and long run perfect competition the resemblance of this market depends on how much t ill resemble a monopoly. If it all happens relatively quickly then more like perfect comp and if it havens slowly more like a monopoly. This is a major incentive to spend large amounts on differentiation. The longer a firm retains its price making power the longer it an make supernormal profit.
>unlike PC not producing at its lowest point of AC means that prices in monopolistic comp tend to be higher than perfect comp because MC spend money on differentiation restricting output as well to maximise profits
86
Monopolistic competition vs perfect competition?
In the short run resembles a monopoly and long run perfect competition the resemblance of this market depends on how much t ill resemble a monopoly. If it all happens relatively quickly then more like perfect comp and if it havens slowly more like a monopoly. This is a major incentive to spend large amounts on differentiation. The longer a firm retains its price making power the longer it an make supernormal profit.
>unlike PC not producing at its lowest point of AC means that prices in monopolistic comp tend to be higher than perfect comp because MC spend money on differentiation restricting output as well to maximise profits
87
What is the definition of a contestable market?
Where barriers to entry/exit is low so if excess profits are made by incumbent firms than new firms will enter. This encourages firms to keep prices at a low level.
88
What discourages new firms from entering the market?
If there are patents, strong brand loyalty, threat of limit pricing by incumbent firms, if new entrants fear a price war, trade restrictions may not allow for foreign firms to compete, if firms are vertically integrated, if there are high sunk costs.
89
What are hit and run tactics?
Entering a market while supernormal profits can be made nd leaving market once prices have been driven down to normal-profit level.
90
Why does the threat of new entrants affect the behavior of incumbent firms?
In a contestable market, threat of competition means that incumbent firms are likely to are likely to set lower firms to avoid attracting new firms into the market thus sacrificing short term profits aiming to create higher barriers to entry eg by spending heavy on advertising . contestable markets in the long run move more towards allocative and productive efficiency.
91
What impacts do technological change have on barriers to entry?
> Can led to creative destruction
>more production methods
>change consumption of goods and services (books)
innovation and invention can also lead to improvements in capital equipment leading to improvements in quality of goods produced
> Cheaper goods may reduce barriers to entry but increases in the level of capital to produce latest products may increase barriers to entry
>Monopoly power for first firm to utilise new invention
>larger eos
>more productivity and efficiency
92
What is creative destruction?
Destruction of new markets cause by change in innovation and inventions leading to the creation of new ones. causes loss of jobs but in long run new jobs created in the new markets improving goods and services.
93
What are the benefits of a monopoly?
>They can exploit large economies of scale to achieve productive efficiency passing on lower prices to consumers. This also improves international competitiveness
> Can also use their profits for research into new production methods and products with more innovation.
94
How can privatisation improve efficiency?
A publicly owned firm is owned by the government, firm will usually act in the best intrest of the consumers- high output, low prices however they are inefficent as they lack competition thus gov may decide to increase competition through privatisation. This will open it up to free market competition with firms aiming to maximise profits.
95
What are the 4 types of privatisation?
Sale of public firm through the sale of shares, contracting out services, competitive tendering- firms bid to gain contract to provide service for the gov, Public Private Partnership-when firm works with the gov eg pfi where private company contracted to build buildings that the gov leased for hospitals.
95
What are the 4 types of privatisation?
Sale of public firm through the sale of shares, contracting out services, competitive tendering- firms bid to gain contract to provide service for the gov, Public Private Partnership-when firm works with the gov eg PFI where private company contracted to build buildings that the gov leased for hospitals.
96
What are the advantages to privatisation?
Increased competition improves efficiency and removes x-inefficiency, improves resource allocation- privatised firms react more to market signals of supply and demand, PFIs enable building of important facilities that the government may not be able to afford to build. PFIs mean lower taxes in the short-run because gov won't pay for the for the new facility immediately, Gov gains revenue from selling the firm.
97
What are the disadvantages to privatisation?
A privatised public monopoly is likely to become a private monopoly so extra measures such a deregulation must be taken to avoid this, privatised firms has less focus on safety and quality because they have more focus on reducing cots and increasing profits, new private firm might need regulating to prevent it from becoming a private monopoly adding costs to taxpayers, a PFI will often cost more in the long run and adds to government debt, PFIs mean higher taxes for future generations to pay so intergenerational inequality.
98
What is deregulation?
Removing or reducing regulation increasing competition. Often happens with privatisation and involves removing legal barriers to entry.
99
What are the advantages to deregulation?
Improves resource allocation making markets more contestable so new firms are likely to enter the market even threat of competition moves it more towards an allocatively efficient point of output.
>can be used along side priavtisation to prevent privatised firm becoming a private monopoly.
>Improves efficiency by removing red tape and beurocracy.
100
what are the disadvantages to deregulation?
Difficult to regulate some natural monopolies e.g. utilities these require large infrastructures i.e. water network needs pipe system and if its expensive to build there's only need for one of them.
Deregulation can't fix negative externalities, consumer inertia
Deregulation migh mean less saftey and protection for consumers.
101
What's the difference between partial market failure and complete market failure?
When there is complete market faluire, no market exists called a missing market and example of this is public goods such as streetlamps or national defence, when the market functions but either price or quantity supplied of a good is wrong there is partial market failure eg healthcare if gov didn't intervene certain people wouldn't be able to afford treatments.
102
Why does market failure occur?
Because the price mechanism only takes into account the private costs and benefits, not the external costs and benefits
103
What are merit goods?
Goods whos whose consumption is regarded as being beneficial to society benefit both individuals and society as a whole but people are unaware of the full benefit they provide. Examples of merit goods include education and healthcare.
Underconsumed for 2 main reasons:
In the free market the external benefits are ingnored so below socially optimum level as don't consider wider impacts of education- more productive workforce.
> Due to imperfect information consumers don't always realise the full benefits that merit goods provide, people may not relaise how serious their health problems are so may demand it less resulting in it being underprovided.
Some merit goods rejected- ie vaccinations.
104
What are demerit goods?
Goods whose consumption is regarded as harmful to the people that consume them, but people are usually unaware of the harmful effect on society as a result of their consumption.
Eg. heroine and cigarettes.
Demerit goods are overconsumed for 2 main reasons:
> Negative externalities are ignored and due to imperfect information where consumers don't realise how harmful the demerit good actually is.
105
How does short term decision making affect the consumption of goods?
People often consider only the short-term benefits and the short term costs with individauls being unable to make provisions for the future.
>The longer-term benefits of merit goods are greater than the short-term benefits of demerit goods.
106
What are the 2 main characteristics of public goods?
Non-excludability- people cannot be stopped from consuming the good even if they haven't paid for it e.g.you couldn't stop an individual from benefiting from the services of the armed forces.
Non-rivalry- one person benefiting from the good doesn't stop other people from also benefiting from the good. ie more people benefiting from the flood defences doesn't stop other people from benefitting from the good.
107
What is a quasi public-good?
Goods that exhibit the characteristics of public goods- so often free for everyone to use (non-excludable) and one person using a road doesn't prevent the other from using it (non-rivalry) However tolls can make a road excludable by excluding those who don't pay to use a road, and congestion can exhibit rivalry.
This also occurs with 2 tv channels as often non excludable and non rival but with tv license no longer the case
108
What is the free rider problem ?
Market failure where once public good is provided it's impossible to stop someone from benefiting from it even if they haven't paid for it. Price mecahnism cannot work if there are free riders as consumers won't choose to buy a public good as they can't get it for free thus everyone waits for it to be bought also difficult to set a price as hard to see what consumers value for it as a result it means firms are reluctant to supply public goods causing market failure so governments have to intervene to provide them.
109
How are some parts of the enviiroment public goods?
Air is non excludable and non rivalry, both clean air and dirty polluted air cost the same so if clean air is scarce price won't rise, non-excludibility of clean air leads to the free-rider problem, benefits of not polluting the air or cleaning the air aren't just restricted to those who have cleaned it, therefore unlikely anyone will celan up or not pollute air, this is known as the tragedy of the commons-
acting in selft intrest will deplete a coomon resource, tragedy of the commons can explain cause of enviromental market faluire govs usually intervene to prevent destruction and degredation of common resources.
110
How does asymmetric information cause moral hazard?
Another possible result of asymmetric information. This happens when people take risks because they won't suffer the concequences themselves if things go wrong. EG. an individual could buy home insurance but then behave recklessly knowing that they are covered this can happen because insurance lacks information about how individual is acting.
111
How can imperfect information cause market faliure?
Means merit goods are underconsumed and demerit goods are overconsumed, many reasons why imperfect information affects consumption.
>consumers may not know the full personal benefit of a merit good. They may not realise how important a good education is
>May lack info in deciding which good/service is the best for them
>consumers may not have information on how harmful a demerit good can be
>Advertising for a demerit good may gloss over any health dangers.
