Prices create incentives for people to alter their economic behaviour
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Rationing function of prices
Rising prices ration demand for a product
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Allocative funciton of prices
Changing relative prices allocate scarce resources away from markets exhibiting excess supply and into markets in which there is excess demand
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Market failure
When the market mechanism leads to a misallocation of resources in the economy
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Missing market
A situation in which there is no market because the functions of prices have broken down
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Private good
A good which is excludable and rival
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Public good
A good that is non-excludable and non-rival
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Quasi-public good
A good which is not fully non-rival and/or where it is possible to exclude people from consuming the product
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Externality
A public good or a public bad where there is a benefit or an external cost
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Positive externality
This is when the social benefit is greater than the private benefit
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Negative externality
This is when the social cost is great than the private cost
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Production externality
An externality which may be positive or negative that is generated in the course of producing a good or service
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Consumption externality
An externality which may be positive or negative that is generated in the course of consuming a good or service
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Social benefit
This is the sum of private benefit + external benefit
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Merit good
A good for which the social benefit exceeds the private benefits
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Demerit good
A good for which the social costs exceeds the private costs
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Social costs
This is the sum of private costs + external costs
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Immmobility of labour
The inability of labour to move from one job to another
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Geographical immobility of labour
This occurs when workers find it difficult or impossible to move between jobs to other parts of the country or other countries
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Occupational immobility of labour
This occurs when workers find it difficult or impossible to move between jobs as they lack the skills required for the new job
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Equity
Fairness or justness
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Inequity
Unfairness or unjustness
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Distribution of income and wealth
The way in which income and wealth are divided among the population
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Regulation
This involves the imposition of rules, controls and constrains, which restrict freedom of economic action in the market place
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Tax
A compulsory levy imposed by the government to pay for its activities
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Price ceiling
This is a price above which it is illegal to trade. This can lead to excess demand
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Price floor
This is a price below which it is illegal to trade. This can lead to excess supply
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Government failure
This occurs when government intervention reduces economic welfare leading to an allocation of resources that is worse than the free-market outcome. This is also known as the law of unintended consequence
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Other cards in this set
Card 2
Front
Prices create incentives for people to alter their economic behaviour
Back
Incentive function of prices
Card 3
Front
Rising prices ration demand for a product
Back
Card 4
Front
Changing relative prices allocate scarce resources away from markets exhibiting excess supply and into markets in which there is excess demand
Back
Card 5
Front
When the market mechanism leads to a misallocation of resources in the economy
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