Fundamentals of a market system - Week 4

Small buyers and sellers

Individual agents’ volume of transaction is so small that the decision to buy or sell a product will not affect the market equilibrium outcome (has no effect on the price of the good)

Freedom to enter and exit

If a seller sees a profitable market, they are free to enter. If they see other markets they want to be in, they can leave

Homogeneous product

All producers sell identical products in the eyes of consumers

Perfect competition

The market mechanism performs “best” under perfect competition (achieving efficiency in resource use) so is therefore a benchmark/ goal/ ideal

Allocative efficiency

In resource use, is achieved when we push the resource use to the point where Marginal Social Benefit of resource is equal to the Marginal Social Cost otherwise known as market equilibrium. Perfect competition delivers this where MSB exceeds MSC for society until they both reach equilibrium

Property rights

Rights of ownership, usage and transfer of resources, goods and services, including intellectual property (patents, copyrights and trademarks)

A rival (depletable)

Pure public good- If a person’s given quantity makes it impossible for others to enjoy it (ie. one’s consumption decreases the supply available to others) eg. most tangible goods and services like using a laptop which means no one else can use it at that current moment

A good non rival

Pure public good- If a given amount of the good can be enjoyed by multiple consumers without decreasing the enjoyment of each other. eg. disney land or amusement parks can equally be enjoyed by everyone no matter how many people there are

Non excludable good

Too costly or nearly impossible to prevent those who refuse to pay from enjoying the benefits of a given amount of the good. eg. a large natural park, a defence system for a region, roads

Negative externalities

Are costs to third parties (people outside a market ie. buyers and sellers) as a result of production and/ or consumption activities in a market, not reflected in the market price of the good

Marginal External Cost

Is the cost to third parties by consuming one more unit of a good