BA1 - Fundamentals of Business Economics - Market Systems and Economies of Scale

Market Failure: Occurs when markets fail to allocate resources efficiently, leading to sub-optimal outcomes.
- Demand and supply are disrupted.
- Governments may intervene to correct.
- Individual rational behavior leads to irrational group outcomes.
- Possible solutions: Private market, government intervention, collective action.

Externalities: Costs or benefits to third parties not involved in the transaction.
- Can be positive (benefits) or negative (costs).
- Examples: Pollution (negative), Education (positive).
Information Failure: Consumers/producers lack information for informed decisions.
Market Control: Firms manipulate prices/output, causing inefficiencies.
- Competition policy and regulations prevent monopolies.
- Government regulations cover:
  - Mergers and acquisitions.
  - Restrictive trade practices.
  - State-created regional monopolies.
Public Goods: Non-excludable and non-rivalrous goods that the market cannot provide.
- Non-excludable: cannot prevent usage.
- Non-rivalrous: one's use doesn't reduce availability to others.
- Examples: clean air, public parks.
Merit and Demerit Goods:
- Merit Goods: Under-consumed goods with social benefits. (e.g., Education, Healthcare).
- Demerit Goods: Over-consumed goods with negative externalities. (e.g., Smoking, Alcohol).

Market prices are influenced by:
- Supply and Demand.
- Production costs.
- Competition.
- Economic conditions.
Government intervention affects prices through:
- Price ceilings: maximum price.
- Price floors: minimum price.
Price controls: Laws enacted by the government to regulate prices.

A government-imposed limit on how high a price can be charged.
- Set below equilibrium price.
- Increases quantity demanded.
- Reduces quantity supplied, leading to shortages.

A government-imposed limit on how low a price can be charged.
- Set above equilibrium price.
- Reduces quantity demanded.
- Increases quantity supplied, leading to surpluses.

Reductions in unit average costs as production increases.
Internal Economies of Scale: Cost savings within a company.
- Technical Economies: Specialized equipment, efficient production techniques.
- Managerial Economies: Specialized management.
- Financial Economies: Access to capital, bulk purchasing.
- Trading Economies: Marketing, brand recognition, risk diversification.
External Economies of Scale: Cost savings within an industry.
- Industry Growth: Supplier networks, skilled labor pool.
- Infrastructure Improvements: Transportation, utilities.
- Technological Advancements: Shared technology, R&D.
- Government Policies: Subsidies, regulations.

Increases in unit average costs as production increases.
Internal Diseconomies of Scale:
- Technical diseconomies: Administrative overhead.
- Trading diseconomies: Standardized products, adapting to market trends.
- Managerial diseconomies: Long chains of command, inefficiency.
External Diseconomies of Scale:
- Increased competition for resources.
- Labor shortages.
- Infrastructure overload.