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CIMA: BA1 > 2: The Market Enviroment > Flashcards

2: The Market Enviroment Flashcards

1
Q

What will an increase in household income do to the demand curve?

A

Rightward shift of the demand curve

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2
Q

What will the fall in price of a good do to the demand curve?

A

An extension along the demand curve.

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3
Q

What will a fall in the production costs of a substitute product do to the demand curve?

A

A inward/leftward shift in the demand curve.

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4
Q

What will the price rise of a complementary good cause to the other products demand, which was in equilibrium?

A

A reduction in demand for both goods, and a fall in price of the other product due to a surplus of supply.

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5
Q

How would a decrease in the cost of labour needed to produce a good, effect the demand curve?

A

It would shift demand curve to the right.

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6
Q

What can cause a product’s demand curve to shift to the left?

A

A change in consumer tastes meaning the product becomes less fashionable.

A fall in the price of a substitute product.

An increase in the price of a complimentary product.

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7
Q

How to calculate new revenue with given change in sales price & price elasticity of demand?

A

Step 1: Calculate % Change in price as normal.
Step 2: Calculate % Change in quantity. (% Chance in price x Price elasticity of demand.)
Step 3: Calculate Increase/decrease in quantity demanded. (% Change in quantity x Quantity)
Step 4: Calculate new quantity demanded. (Old - New Quantity)
Step 5:Multiply by new price to calculate new revenue.

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8
Q

What represents internal economies of scale for a car manufacturing company?

A

Dividing production process into different stages to enable specialisation in specific tasks.

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9
Q

Do governments have to subsidise provision of merit goods?

A

Yes - as otherwise the free market will lead to them being under-consumed.

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10
Q

What is the law of demand?

A

As the price of a good falls, all other things being equal, the quantity demanded of that good increases.

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11
Q

What is the substitution effect?

A

If the price of one good falls - the demand for it will increase. While demand for others similar goods will fall.

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12
Q

What can cause shifts in the demand curve?

A

Level of disposable income

Price of substitutes (Goods that satisfy the same needs)

Price of compliments (Two or more goods that are consumed together)

Pattern of tastes and preferences.

Market Expectations.

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13
Q

What is a normal good?

A

A good buyers will buy more of as their income increases.

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14
Q

What is an inferior good?

A

A good where buyers buy less as their income increases.

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15
Q

What are the differences between a change in price and a change in conditions of demand?

A

Change in price: Demand moves along the demand curve.

Change in conditions: Demand shifts left or right at any given price.

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16
Q

What is the law of supply?

A

As the price of a good rises, all other things being equal, the quantity supplied of that good increases.

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17
Q

List the conditions of supply:

A

The cost of production.

The availability of productive resources

Level of indirect taxes or subsidies.

Price of substitutes in production (alternative products the firm could produce)

Prices of complements in productions (where goods are by-products of each other.)

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18
Q

What is the difference in effect from a change in price vs change in conditions for the supply curve?

A

A change in price will lead to a movement along the supply curve.

A change in any of the conditions of supply will lead to a shift in the supply curve.

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19
Q

What is equilibrium price?

A

The price at which a quantity demanded and a quantity supplied will be equal. & restored by market forces following any changes in conditions to either.

20
Q

What will businesses do if demand is above supply?

A

Raise prices - which will contract the demand curve.

21
Q

What will businesses do if supply is above demand? (Surplus)?

A

Decreases prices - which will extend demand.

22
Q

How to calculate price elasticity of demand? Simple method & Average

A

% Change in quantity / % Change in price.

New demand - Initial demand / Initial demand.

New price - initial price / initial price.

ARC:

Change in demand / Avg Demand.

Change in price / Avg Price.

23
Q

If the price elasticity of demand is > 1 what does this mean?

A

This means that the % change in demand is > than the % change in price. (Demand is responsive to Price changes)

24
Q

What will companies experience if demand is elastic?

A

A rise in revenue if prices are cut

A fall in revenue if prices are increased.

25
Q

If the price elasticity of demand is < 1 what does this mean?

A

This means the % change in demand is < than the % change in price. (Demand is unresponsive to a change in Price.)

26
Q

What will companies experience if demand is inelastic?

A

A fall in revenue if prices are cut

A rise in revenue if prices are increased.

27
Q

What factors can cause a higher Elasticity of demand?

A

Many substitute products available.

Weak brand loyalty.

Luxury products.

A higher proportion of income spent on the product.

Extended time period since the price change

28
Q

What is the effect on revenue at a price elasticity of 1 (Unitary)

A

Revenue is the same at any price level

29
Q

How to calculate price elasticity of supply? And what does it reflect?

A

% Change in quantity supplied / % change in price.

It reflects the ability of firms to increase output when demand rises.

30
Q

What can cause a higher PES?

A

A long time period since the price change. (More time to organise extra production)

The cost of attracting more factors of production (Labour, Capital) is lower.

Excess inventories are available which can be used to supply market.

Spare capacity within firms.

Advancements in technology.

31
Q

What is an economy of scale?

A

A reduction in the cost per unit due to an increase in the size of the firm or of the industry

32
Q

What is the minimum efficient scale?

A

The lowest level of output at which a firm can achieve it’s minimum average cost.

33
Q

What are the types of internal economies of scale?

A

Trading: Bulk discounts
Financial: Lower cost of finance.
Technical: Arising from production process.
Managerial.

34
Q

What are diseconomies of scale?

A

Average cost per units rise as output rises, due to both internal or external reasons.

35
Q

What are methods of economy of scale growth?

A

Horizontal, vertical or conglomerate integration. (Horizontal more likely to create economies of scale.)

36
Q

Strategies for smaller firms around economies of scale?

A

Outsourcing, Offshoring, Shared service centres & flexible staffing.

37
Q

What describes a situation where a firm can reduce unit costs by offering wider selection of products?

A

Economy of scope.

38
Q

What are examples of internal diseconomies of scale?

A

Chains of command becoming excessively long.

Lower morale amongst staff in large firms.

Increased levels of bureaucracy.

39
Q

What will happen if a government imposes a minimum price, below the free market price?

A

No effect on market price.

40
Q

Effects of a maximum price?

A

Shortage of the product, through increased demand. & lower total expenditure as supply drops and prices cannot increase.

41
Q

What is an external social cost?

A

When an economic activity produces negative externalities. When the total cost of the activity is greater than the private cost to the people/firms involved in it.

42
Q

How can a government encourage consumption of Merit goods?

A

Introducing maximum price policies. Which in turn increases demand.

43
Q

What may a government choose to do to tackle an external social cost?

A

Impose an indirect tax - which will raise prices and lower demand.

44
Q

What must demand/supply be for the burden of a tax to fall most heavily on consumers? Why?

A

Demand inelastic.
Supply elastic.

Inelastic demand means the increase in price due to tax will not proportionally decrease demand.

Elastic supply means the increase in price will mean a bigger increase in supply. Allowing suppliers to pass the cost onto consumers.

45
Q

Will a minimum wage cause excess supply or demand?

A

Excess supply - as more workers will be willing to offer themselves as a resource. Which creates a surplus (unemployment)

CIMA: BA1 (6 decks)

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