What is a market?
Institutions in which exchanges take place between parties who voluntarily undertake them.
Examples include markets in land, labor, or luxury goods such as yachts.
What is a market system?
A society-wide coordination of human activities through market transactions.
What is a price signal?
Changes in the price of a good or service which indicate that the supply of or demand for that good or service should be adjusted.
What is market equilibrium?
The continual adjustment of supply and demand, registered through changing prices, allows markets to clear what has been produced, where supply equals demand at some price.
What is welfare economics?
The study of how the allocation of resources and goods in an economy affects social welfare.
What is the fundamental theorem of welfare economics?
The result of any market equilibrium under perfect competition is Pareto optimal.
What does Pareto optimal mean?
A social state where no one’s position can be improved without reducing someone else’s position.
What is cost-benefit analysis?
A form of analysis recommending the policy with the largest net benefits to society, even if it makes some people worse off.
What is anti-trust legislation?
Checks on monopolies, including laws against price fixing and regulations regarding mergers and takeovers.
What are market failures?
Situations where markets produce inefficient allocations of resources or fail to promote individual freedoms.
What are examples of market failures?
- Positive externalities (e.g., research benefiting other firms)
- Negative externalities (e.g., pollution)
- Public goods (e.g., national defense)
- Monopoly power (e.g., Standard Oil).
What is negative freedom?
Freedom from interference.
What is positive freedom?
Freedom to be in control of one’s life.
What is a negative externality?
When an action negatively affects a third party.
What is a positive externality?
When consumption or production benefits a third party.
What is a monopoly?
A market situation where a single company controls the entire market for a product or service.
What are the characteristics of a monopoly?
- Single seller
- No competition
- Price maker
- Market dominance.
What is a public good?
A good that is nonexcludable and nonrivalrous.
What is the free-rider problem?
The issue where individuals consume a public good without paying for it, leading to under-provision.
What is social inefficiency?
A situation where goods are not provided due to the free-rider problem.
What is a merit good?
A good that is undervalued and underconsumed, providing benefits to society beyond the individual, such as education and vaccines.
What is a demerit good?
A good that is overvalued and overconsumed, generating negative externalities, such as tobacco and junk food.
What is the classical school of economics?
A school of thought focusing on free markets and the self-regulating nature of the economy.
What is the neoclassical school of economics?
A school of thought that emphasizes the role of supply and demand in determining prices.
