1. Introduction to Markets

Question 1

Circular Flow of Income

Answer 1

Visual flow of income in economy: see how one change can affect the whole economy

Question 2

Markets Have:

Answer 2

1. buyers
2. sellers
3. commodities
4. voluntary exchange
5. process: buyers and sellers meet
6. price

Question 3

Key Features of Market Economies

Answer 3

1. property rights + private ownership
2. economic freedom
3. self-interest
4. competition
5. moral hazard
6. limited role of government

Question 4

Product Market in relation to CFY

Answer 4

Demand: households (expenditure)
Supply: firms (output)

Question 5

Factor Market in relation to CFY

Answer 5

Demand: firms (income)
Supply: households (factors of production)

Question 6

Perfect competition

Answer 6

1. Large number of buyers + sellers
2. Firms: price takers (no market power)
3. Homogeneous products
4. No barriers to entry or exit

Question 7

Perfect competition example

Answer 7

Agricultural markets

Question 8

Monopolistic competition

Answer 8

1. Many firms
2. Firms: price setters
3. Different products, close substitutes
4. Low barriers to entry
5. Information is imperfect

Question 9

Monopolistic competition example

Answer 9

phone industry, computers

Question 10

Oligopoly

Answer 10

1. Few large firms
2. Sellers: interdependent (strategic behaviour)
3. Goods are close substitutes
4. Barriers to entry exist

Question 11

Oligopoly example

Answer 11

supermarkets (coles, woolies), telecommunications

Question 12

Monopoply

Answer 12

1. One firm
2. Firms: price setters
3. No close substitutes for product
4. High barriers to entry

Question 13

monopoly example

Answer 13

utilities (water, energy)