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Business Economics - Neil Harris - Summary Chapter 6

The document summarizes key topics in Chapter 6 of the textbook "Markets in the real world". It discusses elasticity of demand and supply, market failures, input markets like the labor market, and issues with setting minimum wage levels. The labor market in particular is more complex than classical economic theory suggests due to factors like unions and gender inequalities. Setting the minimum wage also requires balancing social and economic priorities.

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40 views

Business Economics - Neil Harris - Summary Chapter 6

The document summarizes key topics in Chapter 6 of the textbook "Markets in the real world". It discusses elasticity of demand and supply, market failures, input markets like the labor market, and issues with setting minimum wage levels. The labor market in particular is more complex than classical economic theory suggests due to factors like unions and gender inequalities. Setting the minimum wage also requires balancing social and economic priorities.

Uploaded by

Nabila Huwaida
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Assignment 5

Business Economics -- Neil Harris

Chapter 6: Markets in the real world (Summary)

Elasticity of demand

Price elasticity of demand is the responsiveness of the demand for a product to a change in its
price, other things being equal. If the value from an elasticity calculation is greater than 1 then
demand is said to be elastic, i.e. a change in price will create a greater than proportionate change
in quantity demanded. In this case, lowering the price will increase total revenue whilst
increasing the price will reduce it. On the other hand, if the value is less than one, the demand is
considered inelastic, which makes the proportionate change in quantity demanded less than the
change in price.

Elasticity of supply

The price elasticity of supply is a measure used in economics to show the responsiveness, or
elasticity, of the quantity supplied of a good or service to a change in its price. A number of
factors influence the elasticity of supply for a product. The main ones are: (i) the time span; (ii)
the extent to which costs increase as output increases and (iii) the elasticity of supply of the
inputs which make up the product.

Market failures

Market failure is the economic situation defined by an inefficient distribution of goods and
services in the free market. In market failure, the individual incentives for rational behavior do
not lead to rational outcomes for the group. There are a number of reasons why market failure
might occur.

● Inefficiencies
● Imperfect competition
● External economies and diseconomies of production
● Pure private and pure public goods
Input markets

This part of the chapter examines the market for inputs or factors of production, which are also
real world markets concentrating on the labour market. Specifically, this part discusses how the
neoclassical theory suggests how the wage is determined in the labor market. But, in reality,
labour markets do not function as precisely as this theory suggests, which has drawn criticism of
it. There are a number of reasons why neoclassical theory does not fully represent the real world
of business economics.

● Inadequacies of neo-classical theory


● The role of unions
● Inequalities between the sexes

Minimum wage

Low wages and worse, unemployment, have an economic cost to society through their social
effects. These include: tax evasion through the black economy; benefit fraud; increased mental
and physical health problems, and their cost to the National Health Service, associated with low
pay; increased crime; less incentive to work hard and produce better quality output. If a
minimum wage can raise the living standards of the lowest paid then it must help the quality of
the workforce, but needs reinforcing with other aspects, discussed above. Adopting a minimum
wage does not have to mean that the benefits of labour market deregulation are lost. It depends
on the rate at which the minimum wage is set and who is excluded from it. The higher the
minimum wage the more impact on the macro economy it will have, with implications for UK
competitiveness. However, the Labour government also had to consider social priorities.

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