11: Economics

Question 1

What is the market, and market mechanism?

Answer 1

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

Question 2

What is the principle of the demand curve?

Answer 2

Quantity demanded goes up as price falls!

• goods are more affordable
• lower prices makes goods more attractive

Question 3

What is the principle of the supply curve?

Answer 3

The quantity supplied goes up as price increases

• existing suppliers produce more
• new suppliers switch to making the product

Question 4

What are the 8 things that determine demand?

Answer 4

Price of the good itself

Price of other goods

Substitutes

Complements

National income

Fashion

Population size

Credit terms

Question 5

What would cause the demand curve to shift to the right?

Answer 5

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

Question 6

What would cause the demand curve to shift to the left?

Answer 6

Less demand!

Question 7

How to calculate percentage change

Answer 7

New number - old number (to get the difference)

Divide by the old number

Times by 100

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Question 8

What is price elasticity of demand and how is it calculated?

Answer 8

The degree to which demand is effected by the change in selling price

% change Demand / % change Price

Question 9

What is the criteria for elastic or inelastic?

Answer 9

Inelastic < 1
Elastic > 1

Perfectly inelastic 0
Perfectly elastic infinity!
Unitary elasticity 1

Question 10

What 5 factors affect the PED?

Answer 10

Substitues

Time

Competitors pricing

Nature of the product

Proportion of income accounted for by good

Question 11

What are characteristics of inelastics and elastic products?

Answer 11

Inelastic - increasing the price will increase the total revenue

Elastic - increasing the price will cut the total revenue

Question 12

What are Giffen and Veblen goods?

Answer 12

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

Question 13

What is income elasticity of demand and how is it calculated?

Answer 13

The degree to which demand is affected by changes in household income. YED

% change demand / % change household income

Question 14

What is the criteria for income elasticity?

Answer 14

> 1 - luxury goods
0 - normal goods
< 0 - inferior goods

Question 15

What is cross elasticity of demand and how is it calculated?

Answer 15

How the demand is affected by changes in price of other products

% change demand of product A
——————————
% change of price of product B

Question 16

What is the criteria for cross elasticity?

Answer 16

> 0 substitutes

< 0 complementary goods

= 0 unrelated goods

Question 17

What is price elasticity of supply and how is it calculated?

Answer 17

The degree to which supply is affected by changes in the price

% change supply / % change price

Question 18

What is the criteria for PES?

Answer 18

Vertical line
- perfectly inelastic supply
- supply remains constant at all prices

Horizontal line
- perfectly elastic supply
- supply is infinite at a particular price

Question 19

What are the 6 things that determine the supply?

Answer 19

Price of the good

Price of other goods

Price of join producta

Costs

Changes in technology

Other

Question 20

3 factors that influence elasticity of supply?

Answer 20

Market period

Short run - inelastic

Long run - elastic

Question 21

What is the equilibrium price, and how is it achieved?

Answer 21

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

Question 22

Why would the government set minimum and maximum prices?

Answer 22

Maximum - to ensure that goods are affordable

Minimum - to protect suppliers

Question 23

What is the GDP?

Answer 23

Amount of expenditure spent on output

Four factors of production:
- land
- labour
- capital
- entrepreneurship

Question 24

What are the four main influences on the national economy?

Answer 24

Government

Consumers

Savers

Businesses

Question 25

Four main stages of a business cycle?

Answer 25

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!

Question 26

What are the two types of inflation?

Answer 26

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)

Question 27

What is monetary policy and what are examples?

Answer 27

Government policy on:
- interest rates
- exchange rates
- money supply
- quantitative easing

Question 28

What is fiscal policy and what are examples?

Answer 28

Government’s policy on:
- government spending
- taxation
- government borrowing

Fiscal stance can be
- expansionary
- contractionary
- neutral

Question 29

What is supply-side policies and what are examples?

Answer 29

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

Question 30

What is market structure and the four types of market?

Answer 30

Description of the number of buyers and sellers in a market

And their relative bargaining power

• perfect competiton
• monopolistic competition
• ogliopoly
• monopoly

Question 31

What is ‘perfect competition’?

Answer 31

Large number of buyers/sellers

Free entry

Free access

Homogenous products

One selling price

Suppliers make ‘normal’ profits

Question 32

What is ‘monopoly’?

Answer 32

One supplier

Many buyers

Barriers that prevent new entrants

Suppliers can fix price

Super-normal profits

Four types: pure, actual, government franchise, natural

Question 33

What is ‘monopolistic competition’?

Answer 33

Many buyers and sellers

Some differentiation of products

Some customer loyalty

Few barriers to entry

Freedom to set prices

Only normal profits

Question 34

What is ‘ogliopolies’?

Answer 34

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

Question 35

What are the four types of market failure

Answer 35

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