Area of study 2 (Decision making in markets)

Question 1

3:1 What is a market?

Define a “Market.”

Answer 1

A market is any place where buyers and sellers meet to exchange goods and services.

Question 2

3:1 What is a market?

Define the “rate of exchange.”

Answer 2

The “rate of exchange,” in a market is the price at which a particular good or service is sold within a market.

Question 3

3:1 What is a market?

Briefly outline the meaning of the “Price is right.”

Answer 3

The “price being right,” means that both the buyer and seller believe the rate of exchange (price of a good or service in a market) will make them better off.

Question 4

3:2 The law of demand and the demand curve

Define the “Law of demand.”

Answer 4

“As the price of a good or service increases, the quantity demanded will decrease as a result.”

Question 5

3:3

List some non-price factors effecting the demand curve.

Answer 5

: Levels of disposable income
: The price of complementary/substitute items.
: Preferences and tastes
: Interest rates
: Consumer sentiment (Confidence)
: Changes in population

Question 6

3:4

Define the “Law of supply.”

Answer 6

“As the price of a given product increases, the supplied quantity of the product will also increase as well.”

Question 7

3:4

List some non-price factors effecting the supply curve.

Answer 7

: Specific production costs
: Technological change/improvement
: Climatic conditions

Question 8

3:5

Define the “Equilibrium price.”

Answer 8

The equilibrium price is defined as the rate of exchange where the demanded quantity and the supplied quantity of a product are equal. Thus, there is no shortage or surplus of the product when sold at the equilibrium price.

Question 9

3:5

Define a “Shortage.”

Answer 9

A shortage occurs when the demanded quantity for a product exceeds the supplied quantity, known as an excess demand.
A shortage is a result of a product’s price being too low (below the equilibrium price).

Question 10

3:5

Define a “surplus.”

Answer 10

A surplus occurs when the supplied quantity of a product exceeds the demanded quantity, known as an excess supply.
A surplus will typically occur due to the price of a product being too high (above the equilibrium price).

Question 11

3:5

Explain how both a Shortage and a Surplus of a product is eliminated in a market.

Answer 11

: To eliminate a shortage, producers will raise the price of a product to reach equilibrium.
: To eliminate a surplus, producers will lower the price of a product to reach equilibrium.
This concept is formally known as “Convergence,” in a market.

Question 12

3:5

Define the term “Price mechanism.”

Answer 12

The price mechanism is an economic concept describing how the forces of supply and demand within markets impact the relative prices of goods and services.
Relative prices then directly correlate to the resource allocation in an economy on a wider scale.

Question 13

4:1

Define the term “Market power.”

Answer 13

Market power describes the ability of sellers in a market to manipulate prices.

Question 14

4:1

List the four different Market Structures.

Answer 14

: Pure competition
: Monopolistic competition
: Oligopoly
: Monopoly

Question 15

4:1

Describe the features of a market that is classified by “Perfect competition.”

Answer 15

: A large number of sellers and buyers within the market, with the products sold in the market being identical among the sellers.

: Sellers have no market power within this particular structure.

: It’s fairly easy for sellers to enter this market structure.

: Both buyers and sellers have perfect information about the product being sold in the market.

Question 16

4:1
Describe the features of a market that is classified by a “Monopolistic competition.”

Answer 16

: A large number of buyers and sellers within the market, however, there is a slight product differentiation in terms of what gets produced.

: Sellers have some degree of market power within this market structure.

: It’s easy to enter this market as a new producer.

: Both buyers and sellers posses perfect information about the product being sold within the market.

Question 17

4:1
Describe the features of a market that is classified as an “Oligopoly.”

Answer 17

: There is a small number of suppliers within the market, with the range being between 2-6 sellers.

: It’s considerably difficult to enter the market as a new seller due to high start-up costs and other factors.

: Imperfect information is often the case, given that large suppliers will possess more information about a product than the buyers within the market do.

: Sellers in this market structure can collectively execute high levels of market power, however, each supplier can’t do this individually.

Question 18

4:1
Describe the features of a market that is classified as a “Monopoly.”

Answer 18

: A single seller controls the entire output of the market, where this one seller has extreme market power.
: It’s virtually impossible to enter the market as a new seller, and this market structure usually has imperfect information.

Question 19

4:2
Define “Price discrimination.”

Answer 19

This is a strategy used by sellers within markets to help increase business profits. It entails suppliers charging different consumers different prices for an identical product.

Question 20

4:2
Define “Multi-Branding.”

Answer 20

Multi-branding is also a strategy used by sellers to increase/maintain profit in markets. It entails a supplier selling different products under different brand names, with the purpose being to create a barrier for new producers to enter the market.

Question 21

4:2
List some examples of “Anti-competitive,” behavior used by sellers to increase profit.

Answer 21

Predatory pricing:
Cartel conduct:
Exclusive dealing: