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Labour Market

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Labour Market

Did you know that the size of the labour market in the UK is staggering? According to ONS estimates from 2018, the UK labour force numbered 33.8 million people out of a total population of 66.1 million.5 In December 2018, 32.48 million people were employed, while 1.38 million people were unemployed.5 These figures are very interesting, so if you want to find out more about the labour market, keep on reading!

Labour market definition

Labour market definition is - a market where the primary commodity is labour and supply is provided by the employees, whilst the employers are on the demand side. It is sort of a reverse of a regular market where firms are suppliers of a product and consumers provide demand for this product.

The labour market comprises of two parts: home labour supply and firm labour demand. Wages are the cost of labour, which provides an income to people while also being a cost to businesses. Wages are determined by the unrestricted interaction of demand and supply in a hypothetical free-market economy. On the other hand, governments and trade unions can affect wage levels in real mixed economies.

The labour market, often known as the job market, is concerned with the supply and demand for labour. Employees provide the supply and employers provide the demand. The labour market is a fundamental part of a country's economy as it’s intertwined with capital, goods, and service markets.

Many factors affect supply and demand at a macroeconomic level. Some of these are domestic and foreign market dynamics, immigration, population age, and education levels. Other important indicators are unemployment, productivity, participation rates, total income, and gross domestic product (GDP.)

At the microeconomic level, individual enterprises interact with employees hiring, terminating, and increasing or decreasing their salaries and work hours. The link between supply and demand has an impact on the number of hours employees work and the earnings, salaries, and benefits they receive.

Differences and similarities between the labour market and the goods market

The labour and goods markets are similar in their general working mechanisms but they have several differences. The labour market is different from the product market when it comes to the function of supply and demand in setting price and quantity.

In a product market, high demand increases the number of goods produced until the demand is met. However, this is not the case in the labour market where labour cannot be manufactured. An increase in wages will not result in an increase in the supply of labour if we don’ take migration into account. The demand-supply mechanism in the labour market is not as straightforward and linear as in the product market.

Table 1 below provides a comparison between labour markets and commodity markets.

Criteria

Labour markets

Goods or commodity markets

Definition

A process by which supplies of a particular type of labour and demands for that type of labour are balanced, as an abstraction.

A physical place where buyers and sellers of a particular commodity gather for doing transactions.

Relationship between buyer and seller

The relationship between a seller and a buyer in is not temporary and thus personal issues can affect it.

The relationship between a seller and buyer ends when the transaction and transfer of goods are complete.

Perfect or imperfect

It’s primarily an imperfect market. There is no perfect mobility. This results in a wide range of compensation rates for the same sort of work and a lack of a normal wage rates toward which the market rate naturally trends.

Commodity markets are both perfect and imperfect market types. Each is characterised by different factors such as type of goods, price, number of buyers and sellers, etc.

Price setting

Wage fixing is a significant element of the labour market. In the absence of unions, the buyer of labour determines its price.

It is normally the seller who sets the price.

Price fluctuation

The price that is determined in the labour market tends to be fixed for a period of time. Employers do not want pay rates to shift in response to changes in demand and supply.

In a goods market, the price-setting depends on various factors and tends to fluctuate with every change in demand or supply conditions.

Complexity

It is significantly more complicated than the commodities market. Whatever a person’s employment or monetary reward, they believe that they are entitled to proper treatment and that their dignity must be respected.

It functions on the different factors of production and the forces of demand and supply. In that sense, it is less complex compared to the forces of the labour market.

Table 1 - Comparisons between labour markets and commodity markets.

Characteristics of labour market

What are the characteristics of the labour market? The labour market is stable and it lacks mobility. It also lacks variation in wage rates for identical jobs. Employees of other businesses getting lower pay do not leave their positions to work for high-wage enterprises when the price of labour given by a single employer rises.

A labour market might be have a distinct geographical location. However, defining the borders of labour markets is difficult. For some employees, the labour market is national (or perhaps worldwide), whereas, for others, mobility is severely limited.

The size of a market is determined in part by the worker’s talent and education. Engineers and physicians with advanced degrees are likely to find acceptable employment in a variety of locations. Workers in this situation are more inclined to seek a higher-paying position.

Labourers without specialised skills, such as clerks and unskilled workers, find it challenging to get work in a variety of fields. Their labour marketplaces are likely to be limited to their immediate surroundings. In terms of labour mobility, age is also a significant influence. Young employees, on average, are more mobile than their elder colleagues in the workforce.

The most important feature of a rising economy’s labour market is that the great majority of people work as workers, with just a tiny percentage working as employers or as employed managers of employing units. Because the great majority of the population is employed, they are concerned with short-term salary levels, working hours, and working conditions.

Labour demand is the number of people (or hours of work) that an employer is willing and able to hire (in a particular time period) at any given wage rate.

The labour demand curve is a typical downward sloping curve (Figure 1), indicating that employers will recruit more workers at lower wages and vice versa.

Labour Market Labour Demand Curve StudySmarterFig. 1 - Labour demand curve

Labour supply is the number of hours that employees are willing and able to work in a specific period of time. This is not the same as the number of employees. A given number of employees might raise or decrease the labour supply by working more or fewer hours. As a result, rather than backward sloping at higher pay rates, the labour supply curve for the whole economy may be the usual upward sloping curve (Figure 3).

Labour Market Labour Supply Curve StudySmarterFig. 3 - Labour supply curve

Factors affecting labour market

Factors affecting labour market can be divided into factors affecting labour demand and factors affecting labour supply.

Factors affecting the labour market demand are:

  • The wage rate: as the wage rate grows, the demand for labour rises as well. As a result, the labour demand curve begins to trend downward. Every market may use a downward-sloping demand curve to explain the income and substitution effects. When wages grow, businesses try to replace capital with labour, or less expensive labour with more expensive labour. Furthermore, if firms continue to use the same quantity of labour, their labour costs will rise while their income (profits) falls. For each of these factors, demand for labour will decrease as wages rise.
  • The demand for the products: labour demand is derived. This means that it is based on the demand for the product that labour creates. More firms will seek the people who create a given item or service if more customers want it.
  • Productivity of labour: productivity refers to the amount of labour that every worker produces. Those that are more productive will be in higher demand. Skill levels, education and training, and the use of technology all have an impact on productivity.
  • Profitability of firms: if a company is profitable, it can afford to hire additional people. Falling profitability, on the other hand, is likely to diminish labour demand.
  • Substitutes: the degree to which labour is required has an impact on demand. The demand curve for labour will change to the left or right if substitutes, such as capital machines, become cheaper or more costly. For example, if the cost of new technology decreases, demand for labour may decrease as well.
  • The number of 'buyers' of labour: the number of buyers in a market can have an impact on total demand. Monopsonists are sole buyers in a market, and they are quite frequent in labour markets. London Underground, for example, is the only company in the United Kingdom that employs underground tube drivers. In general, when one employer dominates a labour market, demand for labour is lower than when there are several companies. Furthermore, in such marketplaces, salaries have a tendency to be lower, which is one of the reasons why labour unions emerge and pressure for pay increases.

Labour Market Entrance of the London Underground StudySmarterFig. 2 - The London Underground

Factors affecting the labour market supply are:

  • The real wage rate on offer in the industry itself: increased factor incentives are likely to result from greater pay, which should increase the number of persons willing and able to work.
  • Overtime: overtime payments, productivity-related pay schemes, and share option plans are all ways to increase wages.
  • Substitute occupations: the salary and earnings disparity that exists between two or more occupations are influenced by the actual wage rate on offer in competing for employment. A rise in the pay offered to skilled plumbers and electricians, for example, may induce some people to change careers.
  • Barriers to entry: artificially limiting an industry’s labour supply (for example, by imposing minimum entrance requirements) can restrict labour supply and drive up wage levels. This is the case in professions like legal services and medicine, where severe ‘entry criteria’ apply.
  • Improvements in the occupational mobility of labour: if more people are trained in the skills required by the particular occupation, it will improve the overall mobility of labour.
  • Non-monetary characteristics of specific jobs: these include things like job security, working conditions, opportunities for advancement, and the chance to live and work abroad. Also employer-provided in-work training, employer-provided or subsidised health and leisure facilities, and other in-work benefits like occupational pension schemes.
  • The net migration of labour: labour migration is becoming more important in determining the supply of labour available to many industries. This is the result of a rising flow of people seeking work in the UK post-Brexit, whether to relieve skilled labour shortages in the NHS, education, or to meet seasonal demand for workers in agriculture and the construction industry.

Labour Market Ad Panel with a text that reads thank you NHS StudySmarterFig. 4 - Sign thanking the NHS for their work during the Covid-19 Pandemic.

Functions of the labour market

What are the functions of the labour market? Why are labour markets important? Labour markets influence the efficiency of national economies and individual enterprises, as well as employee incentives, such as pay and satisfaction levels. When it comes to national economies, the high rate of unemployment is the most destructive problem in Europe, amid a slew of other labour-related issues.

For example, the unemployment rate in Japan is quite low, indicating that the country's labour market is performing well. Even in Japan, though, there may be hidden labour issues. The US economy has two significant labour market issues: poor real income growth, owing mostly to sluggish productivity growth, and rising wage disparities among employees. Technological advancements, automation, globalisation, and sustainable commerce are reshaping the global labour market and workforce.

The macroeconomic environment serves as a valuable indication of labour market activity, which in turn defines the scope of how businesses attract, retain, and develop their employees in accordance with their overall business plan. People experts may better monitor potential developments and adjust to changes if they are aware of the different linked components that make up this dynamic.

The labour market is where human resources that contribute to GDP are purchased and sold. The higher the potential level of GDP, the larger the volume or quality of human resources available to the market. However, this potential will only be realised if there is adequate demand for these resources, derived from consumer demand. We use the number of individuals working (employment), how long they work (hours), and the number of unfilled job vacancies to calculate the market demand for labour. To calculate supply (unemployment) we use employment plus the number of persons seeking work.

The level of wages and salaries reflects the balance of demand and supply in the labour market (earnings). Earnings will grow if demand is higher than supply. This will raise the cost of hiring people (assuming no change in productivity), lowering demand for human resources, and alleviating wage pressure. If, on the other hand, supply exceeds demand, we may anticipate employment costs to decline and, as a result, labour demand to rise.

The labour market is ‘tight’ during periods of relatively strong demand. Unemployment will be low, and job openings will be plentiful. When labour supply is plentiful the market has few openings and a large number of job searchers.

Labour market in the UK

Let's take an overview of the the labour market in the UK!

Until 2020, the unemployment rate in the United Kingdom was at an all-time low. Pay growth did not occur despite the steady tightening of the labour market, throughout the same time period, owing in large part to the UK’s low productivity. Employers did not appear to be under much pressure from employees to boost salaries, which might be explained in part by the relatively high labour supply fueled by welfare claims, older workers, and EU nationals.

Following a period of high employment and low unemployment, the employment rate has declined and the unemployment rate has risen since the outbreak of the Coronavirus pandemic. However, both have shown indications of improvement since the end of 2020. According to the most recent Labour Force estimates, the employment rate improved by 0.5 percentage points from June to August 2021, to 75.3% as the unemployment rate fell to 4.5%, down 0.4 percentage points.4 The rate of economic inactivity has dropped 0.2 percentage points to 21.1 % from the previous quarter.4

Examples of labour market: issues in the UK

Let's go over some more examples from the UK labour market.

According to the most recent Labour Force Survey figures, the employment rate climbed by 0.2 percentage points from August to October 2021, to 75.5%.1 The number of part-time employees fell sharply during the Coronavirus pandemic but has been steadily growing from April to June 2021, contributing to the employment gain. The unemployment rate fell 0.4 percentage points to 4.2% in the third quarter, but the rate of inactivity rose 0.1 percentage points to 21.2%.1

The Coronavirus pandemic has had a particularly negative impact on young people (aged 16 to 24 years), with employment rates declining and unemployment and economic inactivity rates rising faster than for those aged 25 and up.4 However, over the last quarter of 2021, the employment rate has risen and the unemployment rate has fallen below pre-Coronavirus levels.4

The number of job openings increased to a new high of 1,219,000 from September to November 2021, up 434,500 from the pre-Coronavirus January to March 2020 figure, with 13 of the 18 industry sectors posting new highs.2 However, the rate of increase in vacancies slowed in the third quarter, and the experimental single-month vacancy estimates revealed the first decrease in vacancy numbers since February 2021.2

From August to October 2021, average total pay (including bonuses) increased by 4.9%, while regular pay (excluding bonuses) increased by 4.3%.3 Base and compositional effects pushed up previous months' strong growth rates. These transitory variables have mostly worked their way out of the latest growth rates, although a tiny amount of base impact for particular sectors may still be there.

Labour Market - Key takeaways

  • The labour market is the supply and demand for labour. The employees provide the supply and the employers provide the demand.
  • The labour market must be examined and analysed at both microeconomic and macroeconomic levels.
  • The demand for labour is the willingness of the employer to employ an individual at any given time. The real wage companies are willing to pay for this labour as well as the number of employees ready to supply it at the given rate constitutes this demand.
  • The number of hours individuals are willing and able to work at a certain wage rate is the labour supply. It is the number of people willing and able to work at a certain salary in a specific job or sector.
  • Labour markets influence the efficiency of national economies and individual enterprises, as well as employee incentives, such as pay and satisfaction levels.

References

  1. ONS, Dataset: Labour market statistics time series, 2021, https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/datasets/labourmarketstatistics
  2. ONS, Vacancies and jobs in the UK: December 2021, https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/jobsandvacanciesintheuk/december2021
  3. ONS, Employee earnings in the UK: 2021, https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/bulletins/annualsurveyofhoursandearnings/2021
  4. ONS, Employment in the UK: October 2021, https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/employmentintheuk/october2021
  5. ONS, UK labour market: December 2018, https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/uklabourmarket/december2018

Frequently Asked Questions about Labour Market

The labour market is the supply and demand for labour in an economy. The employees provide the supply and the employers provide the demand. 

Inequality in the labour market is caused by a variation in wage rates for identical jobs. Some employees may be paid significantly less than others for the same jobs.

'Tight' labour market refers to a time when unemployment is low and employers face difficulty filling in their vacancies. 'Loose' labour market refers to a time when unemployment is high and employers can easily find employees to fill in their vacancies.

Labour market affects any business because it has a direct impact on the productive force of any business - employees.

The wage in the labour market is determined by the forces of supply (by the employees) and demand (by employers) for labour.

Final Labour Market Quiz

Question

What is a firm’s main objective?

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Profit maximisation.

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Who are the customers of a firm?


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Individual customers, businesses, or governments.

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What are the financial goals of a firm?


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Profit maximisation, market share expansion.

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What is a firm's profit?


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The difference between the total costs and revenues.

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How to maximise a firm’s profit?


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 Profit is maximised when marginal costs equal marginal revenues.

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What are some non-financial objectives of a firm?


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Customer satisfaction, job satisfaction, corporate social responsibility.

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How to improve employees’ job satisfaction?


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Activities to boost job satisfaction can be taking care of employees’ well-being, offering incentives for good performance, providing an opportunity to learn, and communicating.

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Why is corporate social responsibility important?


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Corporate social responsibility (CSR) includes activities taken by companies to create a positive impact on the society and environment.

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Define government intervention.

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Government intervention is when a government is involved in the marketplace.

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Why do governments intervene in the marketplace?


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To overcome market failure.

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What are the types of government intervention?


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Taxes 

Subsidies 

Minimum and maximum prices 

Regulations

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What are subsidies?


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Subsidies are financial support to products with positive externalities.

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What are minimum prices?


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Setting a lower limit for prices by the government.

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What are the disadvantages of setting minimum prices?


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It can be costly for the government and force it to put tariffs on cheap imports – which damages the welfare of farmers in other countries.

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Give an example of maximum prices.


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The price for bread cannot be higher than 80p/100g.

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What can create a shortage?


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maximum prices

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What are regulations?


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Regulations include non-market based ways of intervention in markets.

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Give an example of regulations.


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Minimum age laws on alcohol, maximum CO2 emissions for vehicles, ban on diesel cars.

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What are the advantages of government intervention?


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The advantages of government intervention are equality, fighting monopolies, public goods, consumer behaviour and environmental protection.

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What are the disadvantages of government intervention?


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The disadvantages of government intervention are worsening the situation, limited choice of products, pressure and dicrimination.

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What are public goods?


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Some goods and services are not provided in a free market because they do not give any financial benefits. Instead, they can be provided by the government.

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What is government failure?


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Government failure is an economic inefficiency caused by government intervention. It is when the government intervenes in the market with good intentions, but in result, creates even more problems by either deepening the market failure or causing a new failure.

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What is monopolistic competition?

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Monopolistic competition is the market structure in which many firms compete to sell slightly differentiated products.

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What are the characteristics of monopolistic competition? 


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The characteristics are:

  • A large number of firms.
  • Slightly differentiated products.
  • No barriers to entry.
  • Firms are price makers. 

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What does the demand curve for individual firms in monopolistic competition look like?


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It is more elastic than the demand curve in monopoly, though not perfectly elastic as in perfect competition.

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Are firms in monopolistic competition price-takers or price-makers? 


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Price makers, though they have limited market power.

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How is the barrier to entry for a new firm in a monopolistic competition market?

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Low or no barrier to entry. Firms can enter and exit the market any time.

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How can firms in monopolistic competition differentiate their products? 


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Products in monopolistic competition can be differentiated with physical attributes such as taste, smell, and sizes, or intangible attributes such as brand reputation, and eco-friendly image.

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When does profit optimization happen in monopolistic competition? 


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At output Q where MC = MR.

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How can firms in monopolistic competition enjoy abnormal profit? 


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In the short-run, companies in a monopolistic market are able to earn abnormal profits at the output where marginal costs equal marginal revenues. 

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Do the abnormal profits in monopolistic competition last in the long run? 


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In the long, due to the increase in the number of firms, the price of the product will drop. Thus, the firms will only make normal profits. 

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What are some examples of fixed costs?

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Some examples of fixed costs include the maintenance costs of an office building, rent, salaries, interest on loans, advertising, and business rates.

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What are some examples of variable costs?

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 Some examples of variable costs include wage costs, basic raw materials (wood, metal, iron), energy costs, fuel costs, and packaging costs.

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What are total costs?

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The total costs (TC) of a company are the fixed costs (FC) and variable costs (VC) added together.

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What are average costs?


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The average cost (AC) or unit cost is calculated by dividing the firm’s total cost of production by the quantity (Q) of output produced.

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 What is the definition of market failure?

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Market failure is an economic term that describes the situation in which the markets perform inequitably (unfairly or unjustly) or inefficiently.

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What causes market failure?

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Market failure is caused by an inefficient allocation of resources which prevents supply and demand curves from meeting at the equilibrium point.

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Give an example of a market failure.

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The free-rider problem. This occurs when there are too many non-paying consumers using goods and services. For example, if too many non-paying consumers listen to the public radio station without giving a donation, the radio station should rely on other funds such as the government, to survive. 

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What does non-rival goods mean?


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The non-rival goods category means that if one person consumes this good it does not prevent another person from consuming it.

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What is the difference between exclusive and non-exclusive goods?


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Exclusive goods prevent non-paying customers from consuming this good. Non-exclusive goods do not prevent non-paying customers from consuming this good or service.

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What is the difference between pure and impure public goods?


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Pure public goods have both characteristics non-rival and non-exclusive while impure public goods have only one of those characteristics.

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What are the main types of market failure?


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  • Complete
  • Partial


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What does complete market failure mean?


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Complete market failure means that there are no goods supplied in the market at all.

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Give an example of a 'missing market'.


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If consumers would like to buy pink shoes, but there are no businesses that supply them. These results in missing markets for this good.

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What does a partial market failure mean?


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In this situation, the market still functions. However, the number of goods demanded does not equal the supply. This results in a shortage or excess supply and inefficient pricing of the goods.

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What are the main causes of market failure?


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  • Public goods

  • Negative externalities

  • Positive externalities 

  • Merit goods

  • Demerit goods

  • monopoly

  • Inequalities in the distribution of income and wealth 

  • Environmental concerns

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Give an example of how negative externalities cause market failure.

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Negative externalities are referred to as indirect costs to individuals. For example, production factories may be releasing dangerous chemicals into the air that may be harmful to people's health to lower the cost of production. This will cause market failure as due to lower production costs there will be excessive production that does not reflect the true product's price and an over-polluted environment.

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Give an example of how demerit goods cause a market failure.

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Demerit goods are harmful to society, such as alcohol and cigarettes. Market failure happens as smokers do not realize the effect that they have on society such as passing the smell and negatively impacting second-hand smokers. They can also cause long-term health problems for themselves and for others. This is all due to overconsumption of this demerit good.

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What does monopoly mean?


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Monopoly means that there is a single or only a few producers in the market which own a vast majority of the market share.


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Give an example of how unequal distribution of income and wealth causes market failure.


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The market failure can be caused by the unequal allocation of income and wealth. For example, due to technology someone receives an extremely high salary in comparison to average workers.

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