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Microeconomics Examples

Have you ever thought about all the microeconomics examples that happen in everyday life? Microeconomics is the study of economics with a spotlight on a person’s or business decision making. John’s decision to open a bakery, for example, will be subject to numerous microeconomics decisions. Follow along to understand more about microeconomics with this story-like explanation!

What is microeconomics?

Let's start from the very beginning: the definition of microeconomics.

Microeconomics is the branch of economics that studies the behaviour of individuals, households, and firms regarding their decision-making in the allocation of their scarce resources. It also studies the interaction between these agents.

You can read more in our explanation on Microeconomics.

If you have read our explanation on Microeconomics, you already know that Studysmarter has divided Microeconomics into seven blocks. Let’s revise those quickly before examining the examples.

The seven blocks of microeconomics

  1. Consumer rationality. It assumes that consumers will make rational decisions to maximise utility given the scarcity of resources.
  2. Price determination in a competitive market. Price in a perfect market is determined by demand and supply.
  3. Production, cost, and revenues. This block determines how much production is needed to generate the target revenue considering all the costs poured into production processes.
  4. Market structures. These determine the nature and competition in the market.
  5. Labour market answers the question: is the necessary labour force available?
  6. Market failure. When price mechanisms fail to allocate resources, the market fails.
  7. Distribution of wealth. Income inequality may cause more poverty even if the standard of living is improving.

In light of these seven blocks, let’s now consider some examples.

Microeconomics decisions examples: How does Microeconomics affect the decisions of entrepreneurs?

Let's take a look at some microeconomics decisions examples. In particular, we want to see how microeconomics affects the decisions of entrepreneurs.

We will use the example of John: a young, motivated entrepreneur who wants to start his own bakery.

Microeconomics Examples A bakery where demand and supply of goods happen StudySmarterA bakery like the one John wants to start. Source: Yeh Xintong, Unsplash.

Consumer rationality

John has to make many decisions before opening his bakery. He has to decide the location, size of the shop, range of rent he can afford, budget for equipment, utilities, raw materials, advertising, and running costs before he starts making profits. Here, John is playing a role of a consumer.

According to his total budget, he will allow a certain amount of funds to every requirement. He has to make decisions rationally. He cannot rent out a shop in the high street and compromise his advertising funds. He has to consider the opportunity cost for his decision.

After considering all factors, John has decided to rent out a shop in a busy locality but with comparatively cheap rent. He did not compromise on equipment and raw materials.

Price determination of a commodity in a competitive market

After scanning through the locality, he spotted that there was only one bakery with a higher price range. The other competitors were supermarkets which sell similar products but at much cheaper prices.

John decided to advertise his freshly baked products at a rate cheaper than the high-priced bakery but costlier than supermarkets. Some of the bakery products have ‘inelastic’ demand and thus price is determined by the market competition. Another factor that will affect prices is the prices of raw materials and utilities. John has considered certain monthly expenses before setting prices for his products.

Demand and supply of goods

In a perfect market, price is determined when demand and supply are in equilibrium. If supply is more than demand, the price will decrease and if demand is more, the price will increase. Figure 1 and Figure 2 show the demand and supply curves, whereas Figure 3 shows demand and supply in equilibrium.

Microeconomics Examples Demand Curve StudySmarterFig. 1 - Demand Curve

Microeconomics Examples Supply curve StudySmarterFig. 2 - Supply curve

Microeconomics Examples Market equilibrium StudySmarterFig. 3 - Market equilibrium

In our example, John has to check with his suppliers for a regular supply of raw materials at a given price.

Consider blueberry muffins are high in demand at John's bakery. He orders more blueberries from his supplier but due to Brexit, the supplier could not import blueberries from the EU causing scarcity of resources.

Now, John has to buy blueberries from another supplier at higher prices. He may increase the price of blueberry muffins at his bakery by a small margin or bear some profit loss. This is how a change in either demand or supply can affect the price.

Production, cost, and revenues

After considering his expenses and choosing his position, John has to calculate how many products he needs to sell to cover his expenses. He has to consider all ‘sunk costs’ and operating costs. He can then use profits to invest it again in the business.

Market structures: competition and monopoly

The UK has a high index of ‘ease of doing business ’. Considering John is based in London, he has fewer barriers to entry. The UK has a mixed economy and the government has many rules that protect small business owners from high competition due to big players.

John has uniqueness in his products. He has identified his market segment. Along with serving incoming customers in his bakery, he has also decided to cater to requests from business clients. This differentiation from his competition gives John an advantage in this market.

Labour market

John can’t do this alone! He needs dedicated and hard-working staff who is skilled and equally enjoy baking. He may have to run the bakery in two shifts, he will also need a barista, a teller, a cleaner, and a pastry chef. As the labour market may provide John with what he is looking for, he has to match their monetary expectations. This may affect his cost of production.

Demand and supply in the labour market are shown in Figure 4 and Figure 5.

Microeconomics Examples Labour Demand StudySmarterFig. 4 - Labour Demand

Microeconomics Examples Labour Supply StudySmarterFig. 5 - Labour Supply

Market failure

It may happen that there is not enough demand for bakery products at a certain price range or there is a shortage of pastry chefs. This may cause fewer sales at the proposed prices.

You may have noticed that many small businesses suffered during the Covid pandemic. Businesses were not able to provide salaries to employees as there was no production and no sales. In such cases, the government may intervene and help correct the market failure.

Distribution of wealth

Income inequality can be a concerning point for small businesses. John has decided on his market segment. His customers are ready to pay a premium for quality bakery products. If income inequality goes on increasing, he may lose his customers or may have to reduce his prices.

Real-life examples of microeconomics

It is evident from the analysis above that microeconomics controls how businesses make decisions.

Market failure examples

To further understand the concepts of Microeconomics, read through the following real-world examples.

Market failure: climate change

Climate change is a significant change in weather over a small period of time. Greenhouse gases are the byproducts of many industrial processes. Some climate change effects are global warming, rising sea levels, storms, and depletion of the ozone layer.

Industries around the world have failed to reduce greenhouse gases and stop climate change. This is a Market Failure. The causes for the market failure are the lack of information or awareness about reducing the emission of greenhouse gases, network effects, and the lack of incentives to innovate using carbon-neutral products and processes. Some governments around the world have taken positive steps to tackle climate change like promoting electric cars.

Market failure in healthcare

Governments highly regulate the healthcare sector. This ensures safe and affordable healthcare services to all. However, high regulations and standards create market entry barriers. This may lead to oligopoly or monopoly in healthcare. There can be negative externalities that disturb the market.

Everyone in healthcare plays an important role. The market will fail if any group, let’s say nurses, go on a strike. You can read more about it in our explanation of Market Failure in Healthcare.

Housing market failure

The housing market can fail due to high house costs, geographical immobilities, environmental factors, and homelessness. The 2008 financial crisis, for instance, began with the relaxed regulations in the housing market.

This allowed for those with poor or no credit history to get loans and mortgages. Many started defaulting on paying back housing loans and the whole system collapsed.

Read more about how the 2008 financial crisis and its effects in our explanation of Housing Market Failure.

Price discrimination example: airline tickets

Price discrimination in airline tickets is a real-life example of microeconomics. The airline industry uses price discrimination and dynamic pricing techniques while setting prices for tickets. Both of these strategies are affected by microeconomic factors.

The price discrimination strategy considers the customers’ purchasing power, the demand for a particular ticket, and the time of the flight (whether is it a busy weekend or unsocial hours). Many airlines charge more for seats with more legroom or business class.

Dynamic pricing takes into account real-time market data. This data includes competitor prices, time of booking, customer behaviour, and remaining seats on an aeroplane.

Microeconomics Examples An airline is a real life example of microeconomics StudySmarterAirlines use price discrimination and dynamic prices to make sure to fill their flights. Source: Hanson Lu, Unsplash.

Market structure examples

An ideal market is a free market without any barriers to entry, with a large number of sellers and a large number of buyers. But real-life situations are far from ideal. Let’s see some examples of the market structures in the UK.

Monopolies in the UK

A firm with over 25% of the market share is defined as a firm with monopoly power. In the UK, big tech companies like Apple, Google, Microsoft, Facebook, and Amazon hold monopolies. Google, for example, controls 70% of the market share of search engines.

The government promotes market competition. It helps keep prices down and the quality of products in check. The government may introduce regulations on mergers or lower the entry barriers. Also, the government protects employees and suppliers from abuse of monopoly powers by nationalization, employment legislation, and legal codes and practices for suppliers.

UK supermarket oligopoly

In the UK, more than 50% of the grocery retail market is captured by four big players: Tesco, Asda, Sainsbury’s, and Morrisons. This is called an oligopoly. Because of oligopoly, consumers get similar products at a similar price in any supermarket.

Nowadays, many consumers are moving towards price leaders such as Aldi and Lidl proving that branding is not as important as pricing in the retail industry.

On the other hand, oligopoly creates high barriers to entry for small players. It becomes difficult for small retail stores to match the prices offered by supermarkets.

Competition and markets authority

The Competition and Markets Authority (CMA) is established to help consumers to ensure decent competition. The CMA monitors mergers to avoid monopolies, shield customers from unfair market practices, and fight against market cartels.

One example of how the CMA works is when it opened an investigation into Amazon and Google handling of fake reviews on their platforms. This was done to protect consumers' interests, and avoid misleading reviews or recommendations on certain products or services.

You can read more about how CMA works in our explanation of Competition and Markets Authority.

Labour market examples

Even though the labour market is a macroeconomic concept, it has an impact on the finances of an individual. For example, trade unions work to protect the rights of an individual employee. Highly dissatisfied employees may go on strikes as a last resort for their demands. Let’s see some examples.

Trade unions in the UK

Almost 6.6 million of the UK workers are part of trade unions like Unison trade union, Unite the Union, and GMB. Their main function is to fight for the rights of employees and oppose employers’ malpractices. Trade unions also demand pay raises and other benefits like pension, bonuses, or retirement schemes. Unison’s latest campaign ‘One team for patient care' had the objective of recognizing the combined efforts of all NHS staff during the Covid-19 pandemic.

Royal mail strikes

The Royal Mail is a government-funded postal service. The Royal mail’s growth was stunned by strikes that began to happen in 2003. The Royal Mail privatisation started in 2013 and was completed in 2015.

The privatization did not stop employees from going on strike. The latest strike was in 2017 when the Royal mail decided to stop the pension scheme for their employees. 89.9% of employees participated in the strike. Finally, a sustainable and affordable solution was worked out along with the unions.

Inequality in the UK

Even though London was considered the richest city in Northern Europe in 2018, 9 out of 10 poorest places on the list are in the UK.

The reasons for inequality in the UK are the skills bias from technological change, education, the raised share of capital income, taxation, executive pay, and bonuses, the rise in a scale of in-work poverty, increasing urban-rural and deep regional economic inequalities, and globalisation.

It has been said that the top 1% of households hold 230 times more wealth than the bottom 10% of households.

Read about the consequences of wealth and income inequality in our explanation on Inequality in the UK.

Microeconomics Examples - Key takeaways

  • Microeconomics is the study of economics with a spotlight on a person or business.
  • All microeconomics examples broadly fall into the seven main blocks of microeconomics studies:
    1. Consumer rationality
    2. Price determination in a competitive market
    3. Production, cost, and revenues
    4. Market structures
    5. Labor market
    6. Market failure
    7. Distribution of wealth
  • Some real-world examples of microeconomics include airlines’ price discrimination, the Royal Mail privatisation and strikes, the market failure in housing, healthcare, and climate change, inequality in the UK, how trade unions work, and the supermarket oligopoly.

Frequently Asked Questions about Microeconomics Examples

Price discrimination in airline tickets is a real-life example of microeconomics. The airline industry uses price discrimination and dynamic pricing techniques while setting prices for tickets. Both of these strategies are affected by microeconomic factors. Price discrimination strategy considers customer purchasing power, demand for the particular ticket, time of flight whether is it a busy weekend or unsocial hours. Many airlines charge more for seats with more legroom or business class. Dynamic pricing takes into account real-time market data. This data includes competitor prices, time of booking, customer behavior, and remaining seats on an airplane.

Market failure in healthcare, price discrimination in airline tickets, market oligopoly, individual income, and saving decisions are some examples of microeconomics.

 The subject of international trade can start at an individual level but may extend to macroeconomic factors that determine the economy between two countries. Hence, international trade cannot be just an example of microeconomics.  

As everyone before making a decision thinks of opportunity costs (knowingly or unknowingly), opportunity cost is definitely studied in microeconomics.

Microeconomics is the branch of economics that studies the behaviour of individuals, households, and firms regarding their decision-making in the allocation of their scarce resources. 

Final Microeconomics Examples Quiz

Question

What is a firm’s main objective?

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Answer

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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