11: Economics Flashcards
What is the market, and market mechanism?
Market - where buyers and sellers come together for the purpose of exchange
Mechanism - interaction of supply and demand for a particular item
SUPPLY and DEMAND
What is the principle of the demand curve?
Quantity demanded goes up as price falls!
- goods are more affordable
- lower prices makes goods more attractive
What is the principle of the supply curve?
The quantity supplied goes up as price increases
- existing suppliers produce more
- new suppliers switch to making the product
What are the 8 things that determine demand?
Price of the good itself
Price of other goods
Substitutes
Complements
National income
Fashion
Population size
Credit terms
What would cause the demand curve to shift to the right?
increase in demand
increase in household income
increase in the price of substitutes
decrease in the price of complements
good becoming more fashionable
expectation that the price of the good will be higher in the next period
What would cause the demand curve to shift to the left?
Less demand!
How to calculate percentage change
New number - old number (to get the difference)
Divide by the old number
Times by 100
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What is price elasticity of demand and how is it calculated?
The degree to which demand is effected by the change in selling price
% change Demand / % change Price
What is the criteria for elastic or inelastic?
Inelastic < 1
Elastic > 1
Perfectly inelastic 0
Perfectly elastic infinity!
Unitary elasticity 1
What 5 factors affect the PED?
Substitues
Time
Competitors pricing
Nature of the product
Proportion of income accounted for by good
What are characteristics of inelastics and elastic products?
Inelastic - increasing the price will increase the total revenue
Elastic - increasing the price will cut the total revenue
What are Giffen and Veblen goods?
Both types have upward-sloping demand curves and positive elasticity
Giffen goods - people buy more of the thing as the price increases
Veblen goods - bought to show off, so a higher price makes them more desirable
What is income elasticity of demand and how is it calculated?
The degree to which demand is affected by changes in household income. YED
% change demand / % change household income
What is the criteria for income elasticity?
> 1 - luxury goods
0 - normal goods
< 0 - inferior goods
What is cross elasticity of demand and how is it calculated?
How the demand is affected by changes in price of other products
% change demand of product A
——————————
% change of price of product B
What is the criteria for cross elasticity?
> 0 substitutes
< 0 complementary goods
= 0 unrelated goods
What is price elasticity of supply and how is it calculated?
The degree to which supply is affected by changes in the price
% change supply / % change price
What is the criteria for PES?
Vertical line
- perfectly inelastic supply
- supply remains constant at all prices
Horizontal line
- perfectly elastic supply
- supply is infinite at a particular price
What are the 6 things that determine the supply?
Price of the good
Price of other goods
Price of joint products
Costs
Changes in technology
Other
3 factors that influence elasticity of supply?
Market period
Short run - inelastic
Long run - elastic
What is the equilibrium price, and how is it achieved?
The price at which supply and demand is equal.
The supply and demand curves move until the new equib is found.
If price too high:
- supplier will lower prices to attract more demand
If price is too low:
- supplier will increase prices to reduce the shortage
Why would the government set minimum and maximum prices?
Maximum - to ensure that goods are affordable
Minimum - to protect suppliers
What is the GDP?
Amount of expenditure spent on output
Four factors of production:
- land
- labour
- capital
- entrepreneurship
What are the four main influences on the national economy?
Government
Consumers
Savers
Businesses
Four main stages of a business cycle?
Recession
- demand falls
- businesses fail
- delation occurs
- production and employment fall
- begins relatively quickly
Depression
- period of full depression
Recovery
- slow to begin
- govs try to boost demand in economy
- recovery will quicken as confidence returns
Boom
- inflation as demand outstrips supply
- businesses are profitable
- future expectations are optimistic!
What are the two types of inflation?
Cost-push inflation - price rises from an increase of production
Demand-pull inflation - price rises from a persistent excess of demand
Main causes of the latter:
- fiscal (government spending/taxes)
- credit (levels of credit for customers increasing)
What is monetary policy and what are examples?
Government policy on:
- interest rates
- exchange rates
- money supply
- quantitative easing
What is fiscal policy and what are examples?
Government’s policy on:
- government spending
- taxation
- government borrowing
Fiscal stance can be
- expansionary
- contractionary
- neutral
What is supply-side policies and what are examples?
Policies designed to encourage suppliers to produce more goods at lower prices
- involvement in private sector
- reduction in taxes
- increasing flexibility
- improving education and training
- increasing competition
- abolition of exchange controls
What is market structure and the four types of market?
Description of the number of buyers and sellers in a market
And their relative bargaining power
- perfect competiton
- monopolistic competition
- ogliopoly
- monopoly
What is ‘perfect competition’?
Large number of buyers/sellers
Free entry
Free access
Homogenous products
One selling price
Suppliers make ‘normal’ profits
What is ‘monopoly’?
One supplier
Many buyers
Barriers that prevent new entrants
Suppliers can fix price
Super-normal profits
Four types: pure, actual, government franchise, natural
What is ‘monopolistic competition’?
Many buyers and sellers
Some differentiation of products
Some customer loyalty
Few barriers to entry
Freedom to set prices
Only normal profits
What is ‘ogliopolies’?
Few large suppliers
Differentiation of products
High degree of mutual dependency
Difficult to predict the actions of competitors in terms of pricing
Collusion to form cartels
What are the four types of market failure
Market imperfections
- not perfect competition
Public goods
- made necessary by public intervention
- no market, allowable to all
Externalities
- private or social costs or benefits from the market, that the markets fail to account for
- negative: social cost is worse than private
- positive: social benefit better than private
Economies of scale
- internal economies: from size of firm
- external economies: from size of industry
What’s always a good answer if the question is a trend that you would expect on the demand or supply curve?
Normal goods
How do complements work?
Tend to be consumed together - if demand falls for one, demand falls for both!
How do inferior goods work?
As income rise, demand for inferior goods will not rise!
What are natural monopolies associated with?
Low marginal costs
The supply curves!!!!!
Vertical line: perfectly inelastic
Horizontal line: perfectly elastic
What do significant rises in factor costs cause?
A contraction in demand and a shift to the left of the supply curve
What are indicators of perfect competition?
Suppliers earn normal profits
Consumers lack influence over market price
A single selling price
Suppliers are price takers, not price makers
What do significant external economies of scale indicate?
The market is growing, so enabling the economies of scale to be achieved
What is the basic economic problem facing all national economies?
Allocating scarce resources
The four factors of production?
Land
Labour
Capital
Enterprise
What is quantitative easing?
The central bank buying government debt from the private sector to increase the liquidity in the economy
