H2 Econs Market Failure + Macro + Globalisation

README:Thoselongparagraphsinwhichseparatepointsarenumbered(like1),2),3))arehowImemorisedtheANALYTICALexplanationsforEcons.Theymayormaynotbeapplicableforyoursyllabus/yourschool.Pleasedoaskyourteachersbeforehand! Defineallocativeefficiency:- Allocativeefficiencyisasituationwherethecombinationofgoods/servicesproducedmaximizesthetotaleconomicwelfareofsociety 1) Howdoesthemarket allocategoodsandservicesthroughitssignalling, rationingandincentivefunctionsof price. NOTABOUTWHY/HOWthemarket mayleadtoefficient allocationof resources Howdoesthefreemarketallocategoodsandservices?Throughitssignaling,rationingandincentivefunctions Signalingrole:Helpstodecidedwhat*andhowmuch*toproduce Assumingaperfectlycompetitivemarket,thereisconsumersovereignty - Consumers‘vote’forwhattheywantfirmstoproducethroughtheirpurchasesand‘vote’againstaproductbynotbuyingthem.Throughtheuseof‘dollarvotes’,consumersdeterminewhatandhowmuchtoproduce→Firmsrespondtothesedollarvotesbyproducingonlythesegoodsatthepricesthattheythemselvesarewillingtoaccept-- Duetotheeconomicconceptofscarcity,firmswilldevotescarceresourcestoproduceagoodonlyifitisprofitable.Howmuchofagoodisactuallyproducedisdeterminedbythepricemechanismfindingthepriceatwhichquantitydemandedequalstoquantitysupplied - Changesinpricesignaltoproducersifmoreorlessresourcesshouldbeallocatedtoproduction,priceswillriseandfalltoreflectshortagesandsurplusesrespectivelyandfirmswilladjusttheirproductionlevelsaccordingly PLEASEGIVEEXAMPLE:- Sayconsumersincreasedemandforagoodlikecarsduetohigherincomes→Riseindemandindicatesahigherwillingnessandabilitytopayahigherprice

- Riseindemandleadstoshortageatinitialprice,causingupwardpressureonprices→incentivisesfirmstoincreasequantitysuppliedbecauseitmeansahigherprofitmargin…alsomeanstheyaregettingmorethantheyneedtocovertheirmarginalcostofproduction→henceexplainingthehigherprofitability.Thisriseinprofitability,signalledbyhigherprice incentivisessprofit-motivatedcarfirmstoexpandproductioninresponsetothechangeinpreference.Thisisindicatedbythediagramasthehigherpriceleadstohigherquantitysupplied(upwardmovementalongsupplycurve) - Theywillthereforehiremorefactorsofproductionlikelabor→andhencemorecarswillbeproduced Consumer-sideThisriseinpriceisalsoasignalandincentiveforconsumers- TheriseinpricesignalstoconsumersthatthenetMBfromconsumingthegoodisnowlowerandthusincentivisesthemtoconsumelessinresponsetothehigherprice(indicatedbydiagram,downwardmovementalongdemandcurve)- Thus,quantitysuppliedrisesandquantitydemandedfallsuntilshortageiseliminatedathigherprice PRICESALSODETERMINEHOWGOODISPRODUCEDiftherearechangesinpriceoffactorinputs- Profit-maximizingfirmstypicallyuseamixoflaborandcapitalintheirproduction,buttheywillstillreacttorelativefactorpricestodeterminehowtoproduce- Ifforinstancelaborismoreabundantthancapitalthereforeitischeaper,assumingthattheyhavethesameproductivity→firmswillbeincentivisedtousemorelabour-intensivemethodsofproduction Rationing- Inpursuitofprofits,firmswillonlyselltheiroutputtothosewhoarewi