Microeconomics & Price Mechanism Flashcards

Vocabulary flashcards covering microeconomics concepts such as market failure, price mechanism functions, allocative efficiency, consumer surplus, and free-market outcomes.

Market failure

When the price mechanism leads to the misallocation of resources in the economy.

Partial market failure

When the market functions, but it delivers the 'wrong' amount of a good or service.

Complete market failure

When a market fails to function at all leading to a 'missing market'.

Positive vs. normative statements

Positive statements can be scientifically tested; normative statements cannot be scientifically tested.

Monopoly and market failure

A monopoly may lead to market failure because monopolists may restrict output leading to higher prices and consumer exploitation.

Incentive function of the price mechanism

When prices provide economic agents with incentives to change their behaviour.

Signalling function of the price mechanism

When prices signal information about markets to economic agents.

Rationing function of the price mechanism

When prices allocate scarce economic resources which are in finite supply.

Allocative efficiency

When it is impossible to improve economic welfare by reallocating resources ($P=MC$ in all markets).

Monopoly and allocative efficiency

A monopoly is unlikely to be allocatively efficient because the firm has enough market power to extract as much profit from consumers as possible reducing consumer surplus and transferring it to producer surplus.

Supplier incentive (rising prices)

When prices are rising, the incentive to suppliers is to supply more to make more profit.

Market signal (price rise from shortage)

When prices rise due to a shortage, the signal broadcast across the economy is more resources should be allocated to this market.

Demand rationing (rising prices)

When prices are rising, demand is rationed because some consumers are not willing or able to pay the higher prices.

Consumer surplus

The difference between the price the consumer pays and the maximum price they are willing to pay.

Monopoly surplus transfer

A monopoly is likely to transfer consumer surplus to producer surplus because prices may rise, causing a reduction in consumer surplus and an increase in producer surplus.

Free-market mechanism and income/wealth inequality

A free-market mechanism may lead to extreme income and wealth inequality because people who own factors of production in high demand, e.g., land, are likely to earn higher incomes than those who don't.

Free-market mechanism and public services

A free-market mechanism may lead to unequal access to public services like health & education because many people will not be able to afford them.

Free-market mechanism and complete market failure

A free-market mechanism may lead to complete market failure because if a good/service isn't profitable it isn't provided.

Factors of production

Land, labour, capital and enterprise.

Free-market mechanism and the climate emergency

Fossil fuel corporations extract and burn fossil fuels because it is highly profitable to do so, which is the main cause of the climate emergency.