economics
- Created by: katier1234
- Created on: 15-12-19 14:08
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- Market Failure- Introduction
- Key terms
- signalling function of prices- prices provide information to buyers and sellers
- incentive function of prices- prices create incentive for people to alter their economic behaviour e.g a higher price creates an incentive for firms to supply more
- Rationing function of prices- rising prices ration demand for a product
- Allocative function of prices- directs resources away from overcrowded markets and forward markets that are underserved
- Complete market failure occurs when the market simply does not supply products at all - we see "missing markets"
- Partial market failure occurs when the market does actually function but it produces either the wrong quantity of a product or at the wrong price
- effects of shifts in demand
- An increase in demand - assume birth rates rises
- consumers demand rises- for baby products e.g cots and push chairs
- if production doesn't increase shortages of the goods develop
- rational producers and shop keepers will want to maximise income so will increase prices- rations demand
- producers will enjoy higher prices- which is an incentive
- other manufacturers will diversify into the market for child care products and therefore existing producers expand
- resources are being allocated in a way the consumer approves of
- production increases for child care products
- resources are being allocated in a way the consumer approves of
- other manufacturers will diversify into the market for child care products and therefore existing producers expand
- producers will enjoy higher prices- which is an incentive
- rational producers and shop keepers will want to maximise income so will increase prices- rations demand
- if production doesn't increase shortages of the goods develop
- consumers demand rises- for baby products e.g cots and push chairs
- An increase in demand - assume birth rates rises
- Markets can fail for lots of reasons:
- Negative externalities (e.g. the effects of environmental pollution) causing the social cost of production to exceed the private cost
- Positive externalities (e.g. the provision of education and health care) causing the social benefit of consumption to exceed the private benefit
- Imperfect information or information failure means that merit goods are under-produced while demerit goods are over-produced or over-consumed
- The private sector in a free-markets cannot profitably supply to consumers pure public goods and quasi-public goods that are needed to meet people's needs and wants
- Market dominance by monopolies can lead to under-production and higher prices than would exist under conditions of competition, causing consumer welfare to be damaged
- Factor immobility causes unemployment and a loss of productive efficiency
- Equity (fairness) issues. Markets can generate an 'unacceptable' distribution of income and consequent social exclusion which the government may choose to change
- Key terms
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