Year 1 micro - different types of markets Flashcards
what is a market economy
an economy where the private sector owns all resources in the economy and allocates goods and services through the market mechanism
what is a command economy
an economic system where all decisions about how to allocate resources are made by the government
what is a mixed economy
an economic system that allows for some government intervention where the market fails to allocate resources efficiently
market economy vs command
- profit motive in market, welfare maximisation in command
- high freedom of choice in market, lower in command
- competition higher in free market
- role of government low in free market
- variety and quality of goods and services higher in market
- quicker respond to demand in market economies, slow in command
- more inefficient in command
- merit goods are under provided and demerit goods are overprovided, compared to command
- under provision of public goods in market economy
- higher income inequality in market
- monopolies in market economy, none in command
why is the quality and variety of goods and services higher in a market economy
- there’s a high incentive to maximise profits and produce goods and services that consumers want/need
- so they will want to produce a variety of goods to satisfy consumers
What is a free market?
Any place where buyers meet sellers to exchange goods and services, free from government intervention
what happens at allocative efficiency
- resources perfectly follow consumer demand
- society surplus if maximised
- net social benefit is maximised
pros of free market economy
- at equilibrium, we will get allocative efficiency
- will never get long run disequilibrium as the functions of price will mean that any excess/shortages will not exist
- encouraged competition, prices are low, consumer surplus is high, quantity and choice is high
- dynamic efficiency and investment
- job creation and economic growth because quantity is high. as labour is a derived demand, increased demand increases employment
- increases freedom, liberty, choice due to lack of govt intervention
- no risk of governemnt failure as there’s no govt intervention
cons of free market economy
- markets can fail, allocative efficient not guaranteed
- we assume that there are no barriers to entry, that there are many sellers who are competitive, this may not be the case, monopolies
- there may be imperfect information, and consumers may not make rational decisions
- externalities may be ignored due to the profit motive
- inequity given inequality , may exclude many consumers from accessing /affording price of goods, bad if the food is a necessity
- excessive profiteering, firms could be maximising profit in a way that is bad for society
- creative destruction, new firms joining the market could destroy pre existing firms, could lead to higher unemployment
- prices can be highly volatile, especially in agricultural and commodity market, demand and supply highly inelastic, high prices , burden on consumer, low prices , burden on producers
What is specialisation?
The concentration of production on a narrow range of goods or services
advantages of specialisation
- higher output, as resources are going to be purely focused on efficient production, which increases trade and growth, higher incomes and higher employment
- wider range of goods/services eg Dyson are a technology company but produce a wide variety of hairdryers, vacuum cleaners etc
- greater allocative efficiency- resources will go to companies/regions who are more efficient at producing and taken away from inefficient production
- greater productivity - workers are used better, used to their maximum productive potential, higher productivity will lower firms COP and can be passed on consumers via lower prices
disadvantages of specialisation
- finite resources , companies or countries that are overspecialised and require a certain input in their production like oil, what happens if oil is depleted? collapse of business
- change in fashion/tastes - overspecialised businesses that haven’t diversified may be at risk
- if foreign firms become more efficient than another industry abroad, the original industry will de industrialise, higher unemployment rates
- international relations issues may cause trade to be blocked off, specialisation inefficient
for specialisation to work, what needs to happen
- there needs to be mutually beneficial trade, countries need to be able to export their surplus of goods/services that they are efficient at producing and import those that they are inefficient at producing
what is division of labour
breaking down the production process into separate tasks upon specialisation
advantages of division of labour
increased worker productivity - reliable as workers are doing the same task continuously, higher productivity may drive up wages, time saving for firms
- lower cop may be passed onto consumers as lower prices
- workers can be complimented with specialist machinery, this can drive up productivity more, machinery speeds up work
- so overall lower price, higher quantity and quality for consumers
