Economics Concepts Essay

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Assumptions of Perfect Competitive market
In the neoclassical model * Firms: Diminishing marginal returns * Consumers: Diminishing marginal utility * The Market: Many firms and consumers * All are price taker * All are rational * All have perfect information * Homogeneous product * Supply and Demand are independent * NO competitive behaviour i.e. no advertising, no product differentiation
The Supply and Demand Curve
Consumer
Surplus
Consumer
Surplus
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Price £
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Price £
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Supply
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Supply

Producer
Surplus
Producer
Surplus

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Qty
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Qty
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Demand
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Demand
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MC
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MC
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Price £
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Price £
Profit Maximization (Marginal Cost = Marginal Revenue)
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ATC
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ATC
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MR = AR = P
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MR = AR = P
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Abnormal Profit
Abnormal Profit
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AVC
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AVC
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Qty
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Qty
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Consumer surplus = value to buyers – amount paid by buyers
Producer surplus = amount received by sellers – cost to sellers
Total surplus = consumer surplus + producer surplus
Efficient: the property of society getting the most it can from its scarce resources
Elasticity of demand: measures responsiveness of demand to changes in price (Qty/Pricex100)
Elasticity of supply: measures responsiveness of supply to changes in price
Shift in demand or supply: welfare loss associated with price controls and taxation

Perfectly Competitive Market allocates resources such as total surplus is maximised, which means allocation of resources is efficient.

Tragedy of commons * if a good such as a village common or an area of fishing is held by in common by a society, there will be a tendency to over-use or exploit it. Each individual gains the full benefit of herding an extra animal, or taking an extra cargo of fish, whereas any loss is borne across the community. Any individual can also argue that if the others exploit the resource he had better do so as well; if the others do not, then it will do no harm for him to take a little more. The inevitable outcome is the eventual destruction of the resource.

Neoliberals: Competition as the general matrix of society. State MUST intervene to create markets * tax * subsidy * education/ hospitality * free goods
Classical Liberals: Exchange as the general matrix of society. Markets emerge naturally.
Govern mentality: A manner, or mentality in which people are governed and govern themselves
Climate change is the greatest market failure? * Market failure: Inefficacy of allocating resources * Cost & benefit * Pollution, CO2, Process * Externalities
Moral hazard * it is a
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