Unit 1 - Markets & Market Failure

Economic Activity
1. Factors of Production
  1. CELL
2. Needs/Wants
3. The basic economic problem
  1. Scarcity
  2. Opportunity Costs
4. Objectives
  1. Individual
    1. Max gains from working
    2. Max purchasing power
  2. Firms
    1. Profit
    2. Growth
5. Economic Systems
  1. Planned
  2. Mixed
  3. Market
Statements
1. Positive
  1. Facts
    1. Can be tested
2. Normative
  1. Opinions
Demand & Supply
1. Demand
  1. Shifts
    1. Price of other goods
      1. Substitutes
      2. Compliments
    2. Compliments
      1. Joint Demand
    3. Change in consumer income
      1. Normal goods
      2. Inferior Goods
    4. Fashion
    5. Disposable income
    6. Interest Rates
    7. Legislation
    8. Population
    9. Exceptions
      1. Ostentatious Consumption
        Luxury items
      2. Speculative Demand
      3. Giffen Goods
        Highly inferior goods
  2. relationship between buyers and suppliers
  3. Types
    1. Latent
      1. Potential
    2. Derived
      1. Demand for X is linked to Y
    3. Composite
      1. More than one use
    4. Effective
      1. Supported by ability & willingness
2. Supply
  1. The quantity of goods sellers are willing to sell at a given price
  2. Types
    1. Actual
    2. Planned
    3. Joint
      1. Production of X leads to production of Y
        Cattle > Beef & Leather
    4. Competing
      1. Production of X is linked to production of Y
        Wheat/Biofuel
  3. Shifts
    1. Increase in costs (CELL)
    2. Legislation
    3. Technology
    4. Productivity
    5. Subsidies
    6. Tax
      1. Ad Valorem
        VAT
        % tax
      2. Unit tax
        per unit
Markets
1. Equilibrium
  1. Demand = Supply
  2. Excess Demand
    1. Supply < Demand
    2. Price above equilibrium
  3. Excess Supply
    1. Supply > Demand
    2. Price below equilibrium
2. Competitive
  1. Large numbers of buyers/suppliers
3. Functions of price
  1. Signalling
    1. Information
  2. Incentive
  3. Rationing
    1. Allocation
4. Specialisation
  1. Benefits
    1. ^productivity
      1. ^output
      2. Lower Costs
      3. More competitive
      4. Growth
  2. Limitations
    1. Workers alienated
    2. Regions may suffer if that industry declines
5. Production costs
  1. Fixed
    1. Rent
    2. Salaries
    3. Insurance
  2. Variable
    1. Raw materials
    2. Labour
  3. Economies of scale
    1. As output rises costs decrease
      1. Then rise (dis-economies of scale)
    2. Internal
      1. Management
      2. Purchasing
      3. Financial
      4. Technical
      5. Marketing
      6. Risk bearing
    3. External
      1. Skilled labour pool
      2. development which benefits all firms
    4. Dis-economies of scale
      1. Alienation of staff
      2. Loss of communication
      3. Management issues
Elasticity
1. Supply
  1. Types
    1. PES
      1. (%ΔQS)/(%Δ£)
2. Demand
  1. Factors
    1. Price
    2. Price of other goods
    3. Income changes
    4. Type of good
  2. Types
    1. PED
      1. (%ΔQD) / (%Δ£)
    2. XPED
      1. (%ΔQD of A) / (%Δ£ of B)
        Substitutes & Compliments
    3. YED
      1. (%ΔQD)/(%ΔY)
        Neccessities & Inferior Goods
3. PED>1
  1. Elastic
4. PED>∞
  1. Perfectly Elastic
5. PED=1
  1. Unitary Elastic
6. PED<1
  1. Inelastic
7. PED=0
  1. Perfectly Inelastic
8. Revenue
  1. Inelastic
    1. ^£ = ^Revenue
  2. Elastic
    1. \/£ = ^Revenue
Market Failure
1. Types
  1. Complete
    1. No supply
  2. Partial
    1. Wrong quantity supplied
2. Public Goods
  1. Non-excludability
  2. Non-rivalry
  3. Free rider problem
  4. eg. Lighthouses
  5. Quasi public goods
    1. eg. Toll roads
    2. It may be possible to exclude
3. Merit Goods
  1. Goods that would be under-consumed (from desirable levels)
  2. eg. Vaccinations
  3. Demerit goods
    1. Goods that are over-consumed causing negative externalities
    2. eg. Alcohol
4. Monopolies
  1. Pure
    1. No incentive to improve
    2. Prices may be artificially high
    3. High profits
  2. Benefits/Costs
    1. Economies of scale
    2. R&D
    3. Price setters
    4. Barriers to entry
    5. Price > marginal loss
Externalities
1. Consumption
  1. Negative
    1. MPB > MSB
      1. Tax applied lowers MSC meaning MSB=MSC @ MSB Q
  2. Positive
    1. MSB > MPB
      1. Subsidy raises MSC meaning MSB is demanded
2. Production
  1. Positive
    1. MPC > MSC
      1. Subsidy to raise MPC to MSC
  2. Negative
    1. MSC > MPC
      1. Taxation to reduce MPC to MSC
Government Intervention
1. Pure public goods
2. Closing the intervention gap
3. Dealing with negative externalities
  1. Regulation
  2. Taxation
  3. Pollution permits
4. Price controls
  1. Price controls
    1. Price floors
    2. Price ceilings
    3. Buffer Stocks
5. Government Failure
  1. Causes
    1. Inadequate Information
    2. Conflicting Objectives
    3. Administration costs
    4. Market Distortions

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Unit 1 - Markets & Market Failure

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	Created by Ben Cooke almost 10 years ago