1.2 Decision Making in Markets Flashcards
Unit 1 AOS 2
Market
Where buyers and sellers come together to exchange goods and services at a price and quantity determined by the market mechanism.
Perfectly competitive market system
- No barriers of entry and exit
- A large number of firms
- Consumer sovereignty
- A homogenous product
- Perfect resource mobility
- Perfect information
Monopolistic market system
- Absence of barriers to entry and exit
- A large number of firms
- Many buyers and many sellers
- Differentiated products
Oligopolistic market system
- Significant barriers of entry
- Dominance of the industry by a small number of firms
- Differentiated or homogenous products
- Firms are interdependent (price wars)
Monopoly market system
- High barriers to entry
- Single or dominant firm in the market
- Firms are independent
- Firm is price maker
- No close substitutes
- No consumer sovereignty
Market power
The ability of firms to influence the market price of a good or service by affecting supply or demand for it. Can control price through its influence rather than competition. Perfectly competitive markets have none.
Effect of market power on prices
Can set prices due to ownership of a large market share, control over critical resources, barriers to entry that prevent new competitors from entering the market.
Effect of market power on resource allocation
Can lead to under allocation of scarce resources into the market, causing shortages and rising prices and have power to set prices above market equilibrium. Make abnormal profits.
Demand
The demand of a consumer indicates quantity of a good/service the consumer is willing and able to buy at different possible prices, ceteris paribus, negative relationship between price and demand.
The demand curve
Every price has an associated quantity demanded (ceteris paribus). Change in non-price factors cause a shift left/right of the demand curve.
Factors of demand
- Change in disposable income
- Price of other products (substitutes and complements)
- Tastes and preferences (marketing and media)
- Demographic (population, age structure, and income distribution)
- Interest rates, seasonal change, government policy
Movement along the demand curve
When price changes due to a change in supply, the quantity demanded either expands (price decrease) or contracts (price increase).
Shifts of the demand curve
Changes in demand cause the curve to shift and don’t result in an increase in price, rather more or less is demanded at the same price. An increase or decrease in demand where demand has changed for any given price.
Supply
The supply of a firm indicates quantities of a good/service a firm is willing and able to supply to the market at a given price, during a particular time period, ceteris paribus.
Market supply
For a good or service includes the quantities supplied by all participants in the market for the specific good or service.
The law of supply
States a direct or positive relationship between the price of a good or service supplied over a given period of time, ceteris paribus.
Factors of supply
- Change in costs of FoPs (fall/rise input costs, indirect taxes)
- Technology
- Productivity
- Climatic factors
Movement along the supply curve
When price changes due to a change in demand, quantity supplied either expand (price increase) or contracts (price decrease).
Shift of the supply curve
Changes in supply do not result in an increase in price, rather more or less is supplied at a given price.
Equilibrium price
The price where the total quantity demanded is equal to the total quantity supplied meaning no shortage or surplus of the product at this price and the market is in a state of balance.
Equilibrium quantity
Volume of goods or services sold in the market at a given equilibrium price over a given period of time.
Q. Analyse the effect or non-price factor on equilibrium price and quantity - steps
- Is this a supply or demand factor?
- Is this an increase or decrease? Why (non-price factor)
- Is this a shift left or right of the curve? Illustrate it
- Does this lead to a surplus or shortage at the original price?
- How will this shortage or surplus impact equilibrium price and quantity?
The 5th mark
Competition (surplus betw. producers and shortage betw. consumers)
Signal (producers supply more or sell cheaper)
Incentive (reallocation of resources or increase in demand)
Summarise
Relative price
The price of one good or service compared to the price of another. Found by dividing good A by good B. Higher price signals to producers to allocate more resources to increase profit and consumer satisfaction.
Multiple branding
Businesses sell multiple brands in same market providing barriers of entry for other firms. Provides illusion of choice to consumer while increasing market share.
Multiple branding - advantages
- Will increase sales by maxing shelf space and minimise for competitors
- Brand switching appeals to consumers who like to experiment
- Competition between managers incentivises them to increase profit
Multiple branding - disadvantages
- Cannibalisation between brands (stealing customers)
- Public image may become more profit rather than consumer oriented
Price discrimination
Strategy that charges customers different prices for the same product.
Price discrimination - advantages
- Increase sales as different prices for different groups
- Will maximise the number of customers willing to buy the product
- Increase reputation, seen as considering different levels of age and income
Price discrimination - disadvantages
- Could be considered unfair, potentially hurts demand or reputation
- Senior or concession customers may be willing to pay more
Anti-competitive strategies
Businesses try to limit competition and will eventually exploit customers.
Price fixing
Firms in an industry collaborate to set prices above market equilibrium price.
Deception
Making misleading comments to consumers to make them behave a certain way.
Predatory pricing
Dominant firms conduct price war involving big price cuts to drive rival firms bankrupt (then firms raise prices).
Market zoning
Competing firms in a region divide the market into zones, areas, or regions where they agree not to compete with each other over prices.
Interlocking directors
Where a person acting as board of directors for one company, is on the board of a rival company. May create a conflict of interest.
