Markets
A market is a place where buyers and sellers meet to exchange goods and services.
Choosing a price:
1) Quality of the product
2) Cost of production
3) Competitors price
4) What consumers are prepared to pay.
Consumer Surplus
it is the difference between the price a consumer is prepared to pay and the price they actually pay.
Supply
Supply is a quantity of goods and services that a supplier is willing to supply at a given price over a period of time.
Factors affecting supply:
1) If the price changes it will be a movement along the curve
2) Costs of productions- increase will shift to left. Decrease will shit to right
3) Technology: Shift to the right
4) Taxes and subsidy: increase tax shit to left. Subsidy to right
5) External shocks: floods shift to left.
Producer Surplus
This is the difference between the price producers are willing to supply a good for and the price they actually receive.
Market equilibrium-
Situation where the supply of an item is exactly equal to its demand. Since neither there is surplus nor shortage in the market, there is no innate tendency for the price of the item to change.
Productive efficiency: is about how to combine the available resources to make a product at the lowest cost.
Technical efficiency: producing as much as possible from a set of inputs.
Cost efficient :
Allocative efficiency: is about what should be produced, how many, and of what kind.
Market Failure
Market failure is where the free market mechanism fails to achieve economic efficiency.(inefficient use of scarce resources.)
Normally regarded as justification for gov. intervention to improve economic and social welfare.
Forms of market failure:
- Under provision of merit goods
- Over consumption of de-merit goods
- Non-provision of pure public goods
- A failure of signaling function of price mechanism to take into account positive and negative externalities.
- Imperfect and asymmetric information among buyers and sellers in different markets.
Externalities are an affect whereby those not directly involved in taking a decision are affected by the actions of others. Effects on economics agents known as third parties.
Negative externalities occur when the Social costs are greater than private costs.
Private costs are the costs incurred by those taking a particular action.
Positive externalities occur when the social benefit is greater than the private benefit.
Private benefits are the benefits directly accruing to those taking a particular action.
external benefits are the benefits that are accrued as a consequence of externalities to third parties.
Public Goods:
Goods that are collectively consumed and have the characteristics of non- excludability and non-rivalry