Chapter 1: Economics of general markets Flashcards
What is a Financial Market
Financial market is a special case of general market.
The good traded os Financial asset (bond, stock, currencies…)
What are the market participants main objectives?
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
Circular Flow definition
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
What are th four main participants in the markets? and what are the two markets?
Participants:
- Consumers
- Business firms
- Governments
- International Participants
Markets:
Product market
Product market- definition
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
Factor market- definition
The factor market is a place where factors of production (land, labour, capital) are bought and sold.
Consumers definition (in the factor and the product market)
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
Business firms definition (in the factor and product market)
Produce goods and service for the product market
By using the factors of production they bought from their owners in factor market
Governments definition
They acquire resources in the factor market and provide service to both consumers and firms.
International participants definition
supply import and purchase exports in the product market
buy and sell resources in the factor market
Market definition
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)
Law of demand
the quantity demanded of a good in a given time period increase as its price falls.
What is the link between individual demand and market demand?
- 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.
What are the determinants of demand?
- Income
- Taste
- Expectations
- Other goods
- Number of buyers
Income - definition and impact on the demand’s curve
Generally speaking if income increases, the quantity will increase as well.
It will increase firm’s revenue.
Taste- definition
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.
Number of buyer
The more people are buying a good/ service, the more the demand will increase and so the firm’s revenue.
Expectations
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.
Other goods
the price of related goods or services.
Inferior goods and complementary goods.
Generally speaking how the different demand’s factors can increase the demand?
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.
the law of supply - def
The quantity of a good supplied in a given period increases as its price increases and vice versa.
Link between individual and market supply
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.
What are the Determinants of Supply?
Technology Factor costs Taxes and subsidies Expectations Other goods Number of sellers
Factor costs - definition
Higher production cost will lower profit, thus hinder supply. Factors affecting production cost are: input prices, wage rate, government regulation and taxes, etc.
Technology - definition
Technological improvements help reduce production cost and increase profit, thus stimulate higher supply.
Expectations-definition
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.
Number of seller- definition
More sellers in the market increase the market supply.
Taxes and subsidies- definition
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.
Price of related and complementary products - definition
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.
When does the supply increase
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
