Chapter 1: Economics of general markets

Question 1

What is a Financial Market

Answer 1

Financial market is a special case of general market.

The good traded os Financial asset (bond, stock, currencies…)

Question 2

What are the market participants main objectives?

Answer 2

Trying to obtain the maximum return from the scarce resources they have.
Consumers : maximize the utility (satisfaction of unmet want) they can get from available incomes.
Businesses: Maximize profits by selling goods thqt sqtisfy while keeping low cost.
Gov: Maximize the general wefare of society

Question 3

Circular Flow definition

Answer 3

The circular flow model demonstrates how money moves through society. Money flows from producers to workers as wages and flows back to producers as payment for products.

In the circular flow: goods and services or resources flow one way, and dollars flow the opposite way

Question 4

What are th four main participants in the markets? and what are the two markets?

Answer 4

Participants:

• Consumers
• Business firms
• Governments
• International Participants

Markets:
Product market

Question 5

Product market- definition

Answer 5

The marketplace in which a final good or service is bought and sold. A product market does not include trading in raw or other intermediate material

Question 6

Factor market- definition

Answer 6

The factor market is a place where factors of production (land, labour, capital) are bought and sold.

Question 7

Consumers definition (in the factor and the product market)

Answer 7

owner of factors of production who supply tem to business firms in factor market and earn income.

Purchase goods and services in the product market

Question 8

Business firms definition (in the factor and product market)

Answer 8

Produce goods and service for the product market

By using the factors of production they bought from their owners in factor market

Question 9

Governments definition

Answer 9

They acquire resources in the factor market and provide service to both consumers and firms.

Question 10

International participants definition

Answer 10

supply import and purchase exports in the product market

buy and sell resources in the factor market

Question 11

Market definition

Answer 11

A market exists wherever an exchange (transaction) takes place.
It can be physical or online market
Every market transaction involves an exchange of dollars for goods and service (product market) or resources (factor market)

Question 12

Law of demand

Answer 12

the quantity demanded of a good in a given time period increase as its price falls.

Question 13

What is the link between individual demand and market demand?

Answer 13

• Each of us has a demand for a good or a service if we are willing and able to pay for it.

Market demand is the collective summation of all buyers’ individual demands.

Question 14

What are the determinants of demand?

Answer 14

• Income
• Taste
• Expectations
• Other goods
• Number of buyers

Question 15

Income - definition and impact on the demand’s curve

Answer 15

Generally speaking if income increases, the quantity will increase as well.
It will increase firm’s revenue.

Question 16

Taste- definition

Answer 16

Buyer’s preferences companies try to influence.

Ex: McDonalds in France and in Hong Kong – the demand for McDonalds is not the same despite people has the same income because of they taste. McDonalds tries to change HK citizen’s taste by attracting them with low price.

Question 17

Number of buyer

Answer 17

The more people are buying a good/ service, the more the demand will increase and so the firm’s revenue.

Question 18

Expectations

Answer 18

Buyers make buying decisions based on a comparison of current and future prices. They are motivated to purchase the good at the lowest price possible. If that lowest price is expected to occur in the future, they will wait until later to buy.

Question 19

Other goods

Answer 19

the price of related goods or services.

Inferior goods and complementary goods.

Question 20

Generally speaking how the different demand’s factors can increase the demand?

Answer 20

The demand increase when:

Income increase
Taste for a good increase
Price of substitute rise 
Price of a complement falls
Future prices are expected to rise 
Number if buyer increase.

Question 21

the law of supply - def

Answer 21

The quantity of a good supplied in a given period increases as its price increases and vice versa.

Question 22

Link between individual and market supply

Answer 22

Individual supply: each producer is willin and able to produce a good or service if he of she can make a profit.
The market supply is the collective summation of all producer’s individual supplies.

Question 23

What are the Determinants of Supply?

Answer 23

Technology
Factor costs
Taxes and subsidies 
Expectations 
Other goods
Number of sellers

Question 24

Factor costs - definition

Answer 24

Higher production cost will lower profit, thus hinder supply. Factors affecting production cost are: input prices, wage rate, government regulation and taxes, etc.

Question 25

Technology - definition

Answer 25

Technological improvements help reduce production cost and increase profit, thus stimulate higher supply.

Question 26

Expectations-definition

Answer 26

If producers expect future price to be higher, they will try to hold on to their inventories and offer the products to the buyers in the future, thus they can capture the higher price.

Question 27

Number of seller- definition

Answer 27

More sellers in the market increase the market supply.

Question 28

Taxes and subsidies- definition

Answer 28

Taxes reduces profits, therefore increase in taxes reduce supply whereas decrease in taxes increase supply. Subsidies reduce the burden of production costs on suppliers, thus increasing the profits. Therefore increase in subsidies increase supply and decrease in subsidies decrease supply.

Question 29

Price of related and complementary products - definition

Answer 29

Firms which are able to manufacture related products (such as air conditioners and refrigerators) will the shift their production to a product the price of which increases substantially related to other related product(s) thus causing a reduction of supply of the products which were produced before.

When two or more goods are produced in a joint process and the price of any of the product increases, the supply of all the joint products will be increased and vice versa.

Question 30

When does the supply increase

Answer 30

supply increase when:

• New technology lowers operating cost
• factor cost decrease
• Taxes decrease or subsidies increase
• Future prices are expected to rise
• Price of alternative good falls
• Number of sellers increase