Provides a weekly (7) summary of notes taken from lectures and the assigned reading; including core principles of economics - consumers, producers, and markets - perfect competition and market intervention - the different forms of competition - the categories of market failure - elements of macroec...
Market and Regulation Summary
WEEK 1: CORE PRINCIPLES OF ECONOMICS
Central Question: How to balance efficiency with the rule of law in the regulation of markets in an international and
European context?
PART 1: CORE PRINCIPLES
• What are the core principles?
1. Efficiency → costs and benefits
2. Welfare → all about making people happy
3. Transaction → transfer of property rights
• Efficiency
It is about costs and benefits
Maximising net-benefits → maximising the difference between benefits and costs - wanting to have the highest
possible benefit and the lowest costs
Pareto-efficiency → no one can be made better-off without making someone else worse-off
• Welfare
What is welfare? → concerned with satisfying people’s desires to make them happy
A term that is subjective and indifferent
• Subjective ➝ similar phenomenon increases welfare for some, decreases for others
• Indifferent ➝ no judgment of people’s desires
Decisions are made under current scarcity
• Scarcity = limited means (eg. time; money; labour; etc.)
• The idea is to achieve the highest form of welfare however there are limited means to establish that
- Hence the challenge for economists is to efficiently maximise social welfare under scarcity
• Scarce resources: Land; labour; capital; and human capital
- These resources are ‘production factors’ combined to produce goods and services
• Transaction
During a transaction there is a simultaneous economic and legal exchange
• The physical transfer of goods and/or services
• Economic transfer of money
• Legal transfer of property rights
Transaction costs → refer to the costs involved in market exchange
• Concerns information costs, bargaining costs, monitoring costs, enforcement costs, etc.
PART 2: ECONOMIC APPROACHES
• Neo-classical economics
Focus
• Production costs → costs of producing goods and the willingness of consumers to pay for goods and how
it comes together
• Rationality → assumes that producers and consumers are rational
- Critique ➝ humans are not all rational beings
• Neo-institutional economics
Focus
• Transaction costs → the costs of people exchanging goods and services (additional to the analysis of
production costs)
• Bounded rationality → assumes not only rationality but also considers the limits to rationality
,• Behavioural economics
Focus
• Cognitive costs → the costs for a person to make decisions
• Predictable irrationality → assumes rationality is replaced by the idea that people are predictably
irrational
PART 3: LESSONS WHEN MEASURING COSTS-BENEFITS
• Striving for efficiency = strive to maximise net-benefits
ie. striving for rational decision making, despite people being known to behave irrationally
• Lesson 1 → Do not forget opportunity costs
Opportunity costs ➝ the value of the next-best alternative that must be forgone in order to undertake an activity
• Rational decisions depend on opportunity costs
• The value derived form the chosen activity (ie. its revenue) is deemed higher than the value of an
alternative activity
• Lesson 2 → Ignore sunk costs
Sunk costs ➝ those costs that will be incurred whether or not action is taken
• ie. the expenditures made in the past that do not influence the future
Rational decision-makers focus on the additional costs that will be incurred
• Lesson 3 → Relevant costs and benefits are marginal
‘Marginal’ = extra / additional
• ie./eg. the future - the past
The level of an activity should be increased only if the marginal net benefit is positive
• ie. when marginal benefit exceeds marginal cost
PART 4: MARKETS
• Production Possibilities Frontier
A graph that shows the various combinations of output that the economy can produce given its production
factors
It assumes that there is:
• Fixed resources
• Fixed technology
• Full employment
NB: changes may be made to the graph, influenced by future innovation (ie. tech
development) and/or investments (eg. in new factories and equipment)
Achieving optimal allocation → allocating production factors in such a way that
consumer preferences are satisfied
• Markets allow individuals and firms to interact, within a regulatory framework, resulting in a mixed and
efficient economy
• Who gets what is decided by purchasing power and individual preferences
- Purchasing power = the amount of money a person or group has available to spend
• Markets and Regulation
Why markets? → Markets are able to achieve an efficient allocation of resources in order to realise maximum
welfare for society
Market Failure → Markets do not always work perfectly; if it fails the government needs to step in with
regulation
Categories of market failure → those distinguished by economists
• Imperfect competition
, • External effects
• Public (“collective”) goods
• Information asymmetries
• Regulatory Failure
Regulatory Failure → when markets fail there is need for regulation but gov regulation is not always perfect
• Laws and regulations may be put in place that hamper markets or do not effectively correct market failures
thus failing to achieve maximum social welfare
Causes of regulatory failure:
• Asymmetric information ➝ the gov makes rules that do not satisfy the consumers preferences simply
because they did not have the necessary information
• Lobbying ➝ eg. companies lobbying rules that are good for themselves but not necessarily good for their
consumers
• Short (4 year) time horizon ➝ politicians may be solely focused on extending their time in office, hence
possibly putting laws in place that are not essentially efficient in the long run
• Budget maximisation ➝ a government administration focused on getting the biggest possible budget rather
than focused on maximising social welfare
• Corruption ➝ dishonest conduct by those in power leading to inefficient regulations (only benefitting
certain parties)
• Perfect Competition
Markets → focus on the supply and demand of certain goods and/or services
• An abstract concept
• Supply = producers
• Demand = consumers
Characteristics of perfect competition:
• Many suppliers and consumers ➝ prevents an individual supplier from influencing the market price
• Homogenous goods provided by suppliers
• No transaction costs:
- Perfectly transparent
- Defined (property) rights
- Free entry into and exit form the market
Imperfect competition → no market is perfectly competitive
• eg. gas market = there are only a few suppliers
• Competition Policy
Competition policy → to create and maintain market environments that enhance the competitive process
• ie. competition encouraged through regulation
• Competition ensures for lower prices of products
Regulation against:
• Cartels (collusion) which raise prices
• Mergers - if done to obtain a dominant position in the market
• Predatory tactics by temporarily lowering prices to obtain dominant position
PART 4: INTRO TO DEMAND
• Demand Curve
Downward sloping → negative relation between price (p) and quantity of consumer (q)
• D = willingness to pay
• An increase in price (from P₂ to P₁) sees a decrease in the number of consumers willing to
pay (Q₂ to Q₁)
• Price decrease has an:
1. Substitution effect → cheaper products sell more and expensive products sell less
2. Income effect → purchasing power increases
> The degree of either effect depends on the price elasticity
, • Price Elasticity
If the price of a certain good goes up by 1% by how much does the quantity of consumers decrease percentage
wise?
Price elasticity is negative
Two forms of price elasticity
• Elastic demand → effect on (q) is large (> -1%)
• Inelastic demand → effect on (q) is small (< -1%)
- eg. demand drops by 0.5%
> The demand curve is shallower (closer to horizontal) for products with a more elastic demand, and steeper
(closer to vertical) for products with more inelastic demand
• Changing Demands
Moving along the curve → indicating a change in price
Shifting the curve → indicating a change in demand based on:
• Change in preferences
• Change in price of another good
• Change in income
Voordelen van het kopen van samenvattingen bij Stuvia op een rij:
Verzekerd van kwaliteit door reviews
Stuvia-klanten hebben meer dan 700.000 samenvattingen beoordeeld. Zo weet je zeker dat je de beste documenten koopt!
Snel en makkelijk kopen
Je betaalt supersnel en eenmalig met iDeal, creditcard of Stuvia-tegoed voor de samenvatting. Zonder lidmaatschap.
Focus op de essentie
Samenvattingen worden geschreven voor en door anderen. Daarom zijn de samenvattingen altijd betrouwbaar en actueel. Zo kom je snel tot de kern!
Veelgestelde vragen
Wat krijg ik als ik dit document koop?
Je krijgt een PDF, die direct beschikbaar is na je aankoop. Het gekochte document is altijd, overal en oneindig toegankelijk via je profiel.
Tevredenheidsgarantie: hoe werkt dat?
Onze tevredenheidsgarantie zorgt ervoor dat je altijd een studiedocument vindt dat goed bij je past. Je vult een formulier in en onze klantenservice regelt de rest.
Van wie koop ik deze samenvatting?
Stuvia is een marktplaats, je koop dit document dus niet van ons, maar van verkoper smaijer. Stuvia faciliteert de betaling aan de verkoper.
Zit ik meteen vast aan een abonnement?
Nee, je koopt alleen deze samenvatting voor €5,99. Je zit daarna nergens aan vast.
