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MICROECONOMICS - Coggle Diagram
MICROECONOMICS
GOVERNMENT INTERVENTION
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Price Controls, Direct Provision and Regulation
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Direct Provision: Government directly provides goods and services, particularly in sectors where private provision is insufficient or inefficient
Public Goods: Non-excludable and non-rivalrous goods provided by the government (e.g., army)
Merit Goods: Goods that are under-consumed in a free market (e.g., education, healthcare)
Regulation: Government creates rules and regulation to control market activities and protect consumers and the environment
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MARKET FAILURE
A situation where the free market, operating on its own, does not allocate resources efficiently from the perspective of society as a whole
Scarce Resources: Land, labour, capital and enterpreneurship
Price Mechanism: In a free market, prices are determined by the forces of supply and demand (should lead to an efficient allocation of the scarce resources)
Allocative efficiency occurs when resources are distributed in a way that maximizes the net benefit to society
MSB=MSC
1) EXTERNALITIES
occur when the consumption or production of a good affects a third party who did not choose to incur that cost or benefit
Negative Externalities: These are harmful effects, such as pollution
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The free-market equilibrium is where MPC=MSB
The socially optimal equilibrium is where MSC=MSB
The gap between MPC and MSC is the external costs
Positive Externalities: These are beneficial effects, such as vaccinations
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The free-market equilibrium is where MPB=MSC
The socially optimal equilibrium is where MSB=MSC
The gap between MPB and MSB represents the external benefit
MARGINAL ANALYSIS
Marginal Private Benefit (MPB): The additional benefit received from consuming or producing one more unit.
Marginal Private Cost (MPC): The additional cost incurred from consuming or producing one more unit.
Marginal Social Benefit (MSB): The total benefit to society, including both private and external benefits.
Marginal Social Cost (MSC): The total cost to society, including both private and external costs.
Socially Optimum Output occurs where MSB = MSC. At this point, the allocation of resources is considered efficient from society's perspective.
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2) PUBLIC GOODS
3) COMMON POOL RESOURCES
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resources that are non-excludable but rivalrous, leading to overuse and depletion
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Government Intervention
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Unsustainable production refers to the production that uses resource unsustainably leading to depletion or degradation
goods that are non-excludable and non-rivalrous, leading to under-provision in a free market.
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DEMAND AND SUPPLY
DEMAND
Demand : Quantities of a good that consumers are willing and able to buy at different possible prices during a particular time period.
Law of demand : there is a negative relationship between price of a good and quantity demanded. eg = as the price of the good increases, the quantity of the good demanded falls (vice versa)
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Market Equilibrium : Occurs where quantity demanded is equal to quantity supplied, and there is no tendenc for the price to change.
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SUPPLY
Supply : Quantities of a good that firms are willing and able to produce and sell at different possible prices during a particular time period.
Law of supply ; there is a positive relationship between price of a good and quantity supplied. eg = as the price of the good increases, the quantity of the good supplied increases (vice versa)
MARKET POWER
PERFECT COMPETITION
MONOPOLISTIC COMPETITION
OLIGOPOLY
MONOPOLY
one large firm, one product with close substitute, high barrier to entry, very significant control over price, no competition
Short run: abnormal profit, normal profit loss
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few large number of firms, differentiated/undifferentiated product, high barrier to entry, significant control over price, some degree of competition
Short run: abnormal profit, normal profit loss
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relatively many firms, differentiated product, no barrier, some control over price, good amount of competition
Short run: abnormal profit, normal profit loss
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very many firms, homogenous, no barrier, price taker, high degree of competition
Short run: abnormal profit, normal profit loss
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CONCEPT
REVENUE CONCEPT
COST CONCEPT
PROFIT CONCEPT
ADDITIONAL CONCEPT
long run (LR)
short run (SR)
economies of scale
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PROFIT MAXIMISATION
abnormal profit
normal profit
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profit
normal profit
abnormal profit
negative profit (loss)
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explicit cost
implicit cost
total costs (TC)
average cost (AC)
marginal cost (MC)
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