Content guidance.
- The reasons for individuals, organisations and societies having to make choices.
The hersh fact that there are not enough resources to satisfy people's demands means that choices must be made. Consumers make choices that determine what is made by producers. This unit requires you to study the market as a system for allocating scarce resources to the production of goods and services.
- Competitive markets and how they work.
This requires you to understand the outcomes that result from the response of consumers and producers to changes in price.
- Market failure and government intervention. This considers the causes and consequences of why market may not work efficiently, including the market failures of externalities, public goods, merit goods, demerit goods and information failures. This part of the unit considers the ways government pursue their economic , social and distributional objectives to intervene and correct market failure through taxation, subsidies, price controls, state provision, regulation , information, provision and competition policy.
- Opportunity cost is a measure of production or consumption in terms of the lost option or the forgone alternative. (The Next Best Alternative).
Factors of production:
- Land - the free gifts of nature
- Labour - the people involved in the production of goods and services.
- Capital - prodeced means of production
- Enterprise - the ability to being together all the factors of production in an efficient and profitable way.
- In an economy based upon a market system, consumers and producers interact in a market place. Consumer Surplus is money consumers are willing to pay to obtain a product but do not have to because they can demand all they want at one price. Producer Surplus is money received by producers over and above the minimum required to bring forth that supply of the product.
- more or less supplied or demanded at the same price is a SHIFT!
- more or less supplied or demanded at the different prices is a MOVEMENT!
Elasticity formula identifies the responsiveness of demand or supply to a change in price: PED or PES.
XED - measure the relationship between the change in price of one product and the quantity demanded of another product.
YED - measure the relationship between changes in income and quantity demanded.
Allocating efficiency means allocating goods to consumers such that their wants are satisfied in the possible way.
Market failure.
Private costs - costs incurred solely by the decision-makers.
External costs- incurred by third parties.
Social costs - total cost to society measured by adding together both private and external costs.
Private benefits - incurred solely by the decision-makers.
External benefits- incurred by third parties.
Social benefits - total benefits to society measured by adding together both private and external benefits.
Externalities and public goods.
Externalities - spill-over - third party effects.
An externality occurs if a third party (someone not directly involved) is effected by the decisions and actions of others. There are 2 types of externality: positive and negative.
Negative externalities is said to exist when the action of one person or firm imposes a cost on to a third party. This cost is known as an external cost.
Positive externalities is said to exist when the action of one person or firn benefits a third party. This benefit is known as an external benefit.
Public goods.
- non-rival - conscemption by one person doesn't diminish the amout of the good that is available for other consumers.
- non-excludable - once the good is provided for just one person it is impossible to prevent any other person from benefiting from the good.
Quasi - public goods.
Lies between these 2 extremes: it has characteristics that will some of the time - though not always - lead it to be close to a public good. Examples: national parks, beaches.
Information failures and merit gods.
Information failures. Markets will fail if consumers and producers do not have access to this perfect information.
Merit goods - one that is better for an individual than the person who consumers the good may realise.
Demerit goods is one that is worse for the individual than the person who consumes the good realises.
Methods of government intervention in markets.
Methods of intervention:
- regulation
- financial intervention (tax and subsidy)
- state production
- income/other transfers:
- income - pay cash benefits to families on low income
- in-kind - free goods and services to poor families.
Information failures
- provision of information - helps consumer make an informed choice
- controls and regulation
- financial intervention (tax, subsidy)
Redistribution issues
- redistributive taxation - high % tax from the rich
- redistributive social security payments
- benefits paid in kind
- subsidy of essential goods - make up a large proportion of a poor person's income but a relatively small part of a rich person's income.
