Principles of economics, year 1 IBMS block 1.
chapter 4
I passed my economics with a 7.6 using also this document. I really tried to describe it in my own words. Which can make it more easy to understand. I explain the jargon in a less difficult way.
Demand-side market failures:
Happens when demand curves do not reflect consumers fill willingness to pay for
a good or a services.
Example: fireworks: people enjoy seeing fireworks and are therefore willing to
pay for it, but you can’t say to the people who have not paid you can’t look to
our firework show, because displays are outdoor and in public. So people don’t
actually have to pay to see the display, because there is no way to exclude those
who haven’t paid from also enjoying the show. Private firms will therefore be
unwilling to produce outdoor firework, because it’s impossible to raise enough
revenue to cover production cost.
Supply-side market failures:
Supply curves do not reflect the full cost of producing a good services. A firm
does not have to pay the full cost of producing its output.
Example: coal-burning power plant. A company needs to pay for all different
costs land, labor, capital and entrepreneurship. But if the firm is not charged for
the smoke that it releases into the atmosphere, it will fail to pay another set of
costs- the costs that is pollution imposes on other people. Includes future harm
from global warning, toxins for wildlife and possible damages around.
Consumer surplus:
The difference between the maximum prices a consumer is willing to pay for a
product and the actual price that they do pay. The benefit received.
If a consumer is willing to pay 1, 25 euros for an apple. It is perfect if it less, but
you will not buy if it is more 1, 25 euros. So if in the end the apple is only 0, 50
cents the consumer has a surplus from 0.75 cents. (1.25 – 0.50 = 0.75).
The lower the price how more consumers will have a surplus or their maximum
price so they will buy the product.
Producer surplus:
Difference between the actual prices a producer receives and the minimum
acceptable price that consumer would have to pay to the producer to make a
product.
The minimum acceptable price for a product will be equal the producer’s
marginal cost of production. The actual price is also the EP. The producers
surplus is the price that the consumer minimum has to pay for a product and the
balance that between consumer and producer (EP).
3 euro is minimum price for a candy bag, but the producers need to make
revenue and profit but also it can’t be too expensive because then the
consumers think it too much. So 8 is in the middle.
(8 – 3 = 5) 5= consumer surplus.
Efficiency losses:
Reduction (vermindering) of combined consumer and producer surplus- result
from both underproduction and overproduction. The output falls from the
efficiency amount to a smaller amount.
, Private goods:
Goods offered for sale in stores, in shops and on the internet. (automobiles,
clothing, personal computers, a ticket to the movie ect.)
Private goods are distinguished:
Rivalry:
When one person buys and consumes, it is not available for another person to
buy and consume.
Excludability:
Only people who are willing to pay the market price for bottles of water can
obtain these drinks and the benefits they confer. To the seller can keep people
who do not pay for a product from obtaining the benefits.
Excludability means that sellers can keep people who do not pay for a product
from obtaining its benefit.
Public goods:
Opposite of private good.
Nonrivalry:
If someone is using a good someone else can use it too.
Everyone can obtain benefit from a public good such as national defense, street
lightning, airforce flight plane or police car.
Nonexcludability:
There is no effective way of excluding individuals form the benefit of the good
once it comes into existence. Once in place, you cannot exclude someone from
benefiting from national defense or street lightning.
These two characteristics create a free-rider problem:
Once a producer has provided a public good, everyone including nonpayers, can
obtain the benefit.
National defense and street lightning are examples of nonrivalry and
nonexcludable. is also an example of a public good.
The government can provide the efficient amount of a pubic goods by adhering
to which of the following rules: Marginal benefit equals marginal cost.
Everyone can benefit from public goods and there is no effective way of
excluding individuals from the benefits derived from them once they exist.
Non-rivalry in consumption means that one person’s consumption of a good does
not perclude consumption of the good by other.
When there is no effective way of keeping individuals from the benefit of a good
once it comes into existence is nonexcludability.
The situation when people can receive the benefit from a good without having to
pay for it is known as the free-rider problem. The free rider problem makes it
difficult for firms to gather resources and profitably provide a good.
Excludability means that buyers who are willing and able to pay the market price
for the product obtain its benefit, but those unable or unwilling to pay the price
do not.
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