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Economics 03

Economics lesson 5 to 6

TermDefinitionExtra Definition
How the market system can fail Firms will only produce goods and services if they are profitable, supply products to consumers who are able to pay for them. Resources will only be employed if it is profitable to do so. Harmful goods may be produced if it is profitable to do so. Some producers and consumers may ignore the harmful effects of their activities on others and the environment. Some firms may restrict competition, mislead cogsumers and charge them very high prices.
In a mixed economy a government can intervene in different markets in an attempt to correct the worst market failures It can provide useful and essential goods and services. It can employ people in public sector organizations and provide financial support to private sector firms to boost output and employment. It can provide goods and services for people in the greatest need. It can outlaw the production of harmful goods and dangerous activities. It can outlaw business practices that restrict competition or mislead consumers.
A mixed economy therefore combines the advantages of a market economic system with Government ownership and control of some scarce resources. Government interventions to regulate the actions of private sector firms and consumers in some markets.
By correcting failures in some markets, a government may distort the allocation of resources and cause problems in others High taxes on people and firms can distort market price signals and reduce work incentives. Land regulations can increase production costs and thereforereduce the profitability and supply of some goods and services. Public sector organizations may be inefficient and produce poor-quality goods and services because they do not have to make a profit. Some government spending may be for political or even personal gain.
Demand Willingness and ability to purchase a good at a certain price.
Quantity demanded The quantity of a product that consumers want to buy.
Individual demand The demand of just one consumer.
Market demand The total demand for a product from all of its consumers.
The Law of Demand states As the price of a product falls, the quantity demanded will usually increase.
Effective Demand The word“effective' means that people must actually have the money to make the purchases. e.g. we could all claim to demand a Porsche at $80,000. But, how many of us actually have that amount of money?
A contraction or an extension of demand Movements along the demand curve are caused by a change in price of that good.
Contraction of demand When price increases and demand decreases.
Normal Goods For most goods, as income rises, demand will rise as consumers can now afford to buy more of everything. This will result in a shift to the right of the demand curve. For some products this could be a very small shift.
Inferior Goods Inferior goods are those that consumers will buy less of if their incomes increase. This is because they will buy higher priced alternatives instead. An increase in incomes will cause a shift to the left of the demand curve.
Luxury Goods They are some products that consumers will demand lots more of if their incomes increase.
Substitutes Products that compete for demand as they can be used in place of each other. These products can be competitor products or other products that fulfill the same needs.
Complements Complements are products that are joint in demand as they are related products.
Ceteris Paribus All other variables are held constant.
Consumer Incomes A change in consumers incomes will cause a shift in the demand curve. This shift could be small or large. A change in income will affect normal and inferior goods differently.
Influences on Demand Price of other products (Substitutes and Complements), Tastes and Fashions, Advertising and promotion, Seasonal factors, Government Interventions, Weather, Consumers incomes, Changes in the population.
Market failure When free markets fail to produce goods and services that are worthwhile or when the decisions of producers or consumers result in wasteful or harmful activities.



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