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2. Role of Markets
Micro (2.6-2.11)
| Term | Definition |
|---|---|
| Complementary Goods | negative XED; if good B becomes more expensive, demand for good A falls |
| Cross Elasticity of Demand | the responsiveness of demand of good A to a change in the price of good B: % change in QD of A/ % change in P of B |
| Elasticity | how responsive demand or supply is to a change in price |
| Income Elasticity of Demand | the responsiveness of demand to a change in income: % change in QD/ % change in income |
| Inferior Goods | YED>0; goods which see a fall in demand as income increases |
| Luxury Goods | YED>1; an increase in incomes causes an even bigger increase in demand |
| Normal Goods | YED>0; demand increases as income increases |
| Perfectly Price Elastic Good | PED/PES=Infinity; QD/QS falls to 0 when price changes |
| Perfectly Price Inelastic Good | PED/PES=0; QD/QS doesn't change when price changes |
| Price Elastic Good | when PED/PES>1; demand/supply is relatively responsive to a change in price so a small change in P leads to a large change in QD/QS |
| Price Elasticity of Demand | the responsiveness of demand to a change in price: % change in QD/ % change in P |
| Price Inelastic Good | when PED/PES<1; demand/supply is relatively unresponsive so a large change in P leads to a change in QD/QS |
| Substitutes | positive XED; if good B becomes more expensive, demand for good A rises |
| Unrelated Goods | XED=0; if the price of good B changes, it has no impact on the demand for good A |
| Diminishing Marginal Utility | the extra benefit gained from consumption of a good generally declines as extra units are consumed; explains why the demand curve is downward sloping |
| Margin | the effect of an additional action |
| Externalities | the cost or benefit a third party receives from an economic transaction outside of the market mechanism |
| Marginal External Benefit | the extra benefit to a third party not involved in the economic activity, per unit consumed |
| Marginal External Cost | the extra cost to a third party not involved in the economic activity, per unit consumed (MSC-MPC) |
| Marginal Private Benefit | the extra benefit to the individual, per unit consumed |
| Marginal Private Cost | the extra cost to the individual per unit consumed |
| Marginal Social Benefit | the extra benefit to society, per unit consumed (MEB+MPB) |
| Marginal Social Cost | the extra cost to society, per unit consumed (MEC+MPC) |
| Market Failure | when the free market fails to allocate resources to the best interest of society, so there is an inefficient allocation of scarce resources |
| Negative Consumption Externality | MPB > MSB |
| Negative Production Externality | MPC > MSC |
| Positive Consumption Externality | MSB > MPB |
| Positive Production Externality | MSC > MPC |
| Asymmetric Information | where one party has more information than the other, leading to market failure |
| Demerit Good | good with negative externalities |
| Information Failure | when an economic agent lacks the information needed to make a rational, informed decision |
| Merit Good | goods with positive externalities |
| Moral Hazard | where individuals make decisions In their own best interests knowing there are potential risks for others |
| Free-Rider Problem | people who do not pay for a public good but still receive benefits from it, so the private sector will under-provide the good as they can't make a profit |
| Non-Diminishability/Non-Rivality | a characteristic of public goods; one person's use does not prevent someone else from using it |
| Non-Excludability | a characteristic of public goods; someone can't be prevented from using the good |
| Non-Rejectability | a characteristic of public goods; people can't choose not to consume the good |
| Private Goods | goods that are rival and excludable |
| Public Goods | goods that are non-excludable, non-rivalrous, non-resectable and have zero marginal cost |
| Quasi-Public Goods | goods which aren't perfectly non-rivalrous/non-excludable but aren't perfectly rivalrous/excludable |
| State Provision | when the government provides public goods or merit goods which aren't under provided in the free market |
| Buffer Stock Schemes | the introduction of both a maximum and minimum price in the market to prevent large fluctuations in price |
| Competition Policy | government action to increase competition in markets |
| Government Failure | when government intervention leads to a net welfare loss in society |
| Indirect Tax | taxes on expenditure which increase costs of production and lead to a fall in supply |
| Information Provision | when the government intervenes to provide information to correct market failure |
| Maximum Price | a ceiling price which a firm can't charge above |
| Minimum Price | a floor price which a firm can't charge below |
| Public/Private Partnerships | when the government and private sector work together to build and operate projects |
| Regulation | laws to address to market failure and promote competition between firms |
| Subsidy | government payments to a producer to lower their costs of production and encourage them to produce more |
| Tradable Pollution Limits | licenses which allow businesses to pollute up to a certain amount. Businesses can buy/sell the permits which provides an incentive to reduce pollution |
Created by:
19thomps