Markets

market

any situation when the producer and consumer of a product come into contact to aggree a price and exchange the product for money

equilibrium point

where demand and supply are equal on a diagram

joint/complimentary demand

when 2 goods tend to be demanded together

competitive demand

when the goods are close substitutes

derived demand

when the goods are close substitutes

composite demand

when a commodity can be used for two or more purposes 

joint supply

when 2 or more goods are produced together

competitive supply

when an increase in supply of one good results in a decrease in the supply of the other

price mechanism 

the process used in market economic systems and in the private sector of mixed economies to allocate resources. Iy usese the forces of demand and supply yo determine the price of a product

3 key elements of price mechanism

signalling, rationing, incentive

signaling

when the price of a product rises it signals to producers that the demand for the product is probably high and firms should increase production

rationing

when demand is greater than supply, prices will rise s that the good/service is rationed out only to those who can afford to pay for the items 

incentive

when the price of a product rises it creates an incentive for firms to shift production towards those producta thay help generate higher profit

advantages of price mechanism

• an efficient allocation of resources is achieved as firms move resources from producing products which are not in demand to those which are in demand

• resources are allocated on the basis of demand si consumers can buy exactly what they most demand

• the syste is flexible as changes in demand quicly bring about changes in supply - shortages and surpluses do not last long

• in theory thre is no need for the government to regulate the market as the forces of demand and supply will alocate resoucres to their most efficient uses and resources wont be wasted

disadvantages of price mechanism

• merit goods, public goods and unprofitable goods would be underprovided or not provided at all by the price mechanism 

• over-production of demerit goods

• externalitites will not be corrected 

• income inequality will occur as there is no tax and benefit system to reallocate some income from the rich to the poor 

market failure

when a market does not lead to an efficient allocation of resources

examples of market failures

• the under provision of public goods

• the under provision and underconsumption of merit goods

• the overprovision or overconsumption of demerit goods

• the overproduction and overconsumption of products with negative externalities

• the underproduction and underconsumption of products with positive externalities

• monopoly power

• income inequality

• lack of information

• immobility of resources

public goods

products which private firms do not want to produce because they are not profitable

merit goods

products which are considered very important (healthcare, education)

demerit goods 

products which have negative impact on those consuming them and others (alcohol, tobacco)

negative externalities

a negative spillover effect on a third party caused by either production or consumption e.g. pollution

positive externalities

a positive spillover effect on a third party caused by either production or consumption e.g. vaccination

barriers to entry

any factor making it difficult for new firms to enter a market e.g. high set up costs

normal profits

the minimum profit an entrepreneur needs to earn to keep running the firm

abnormal profits

any extra profit earned above normal profit

perfect competition

• a large number of small firms

• all firms produce homogenous products

• all firms sell at a market price (price takers)

• no barriers to entry

• perfect information - consumers and firms know everything about all the other firms

• in the long run only normal profits are earned

• firms are both allocatively and technically efficient as they face so much competition

monopoly

• one large firm

• the firms produce a unique product

• the firms sets its own price (price makers)

• very high barriers to entry and exit

• as there is only one firm the only information is about them

• in both the short and long run abnormal profits are earned

• firms are both allocativelly and technically efficient as they have no competition