Chapter 13, 14 Flashcards
Macroeconomics
National economy and government policies
Microeconomics
Demand and supply + Market structures
The national economy
the national output of goods and services is measured as GDP
Factors of production
Land, labour, capital and entrepreneurship
Influences on the national economy
Government
Consumers
Savers
Businesses
Business trade cycle
The continual sequence of rapid growth in GDP, followed by a slow down in growth and then a fall. Growth then comes again and when this has reached a peak the cycle begins again.
Traits of the boom phase
Demand may outstrip supply causing inflation
Businesses tend to be more profitable
Expectations of the future are very optimistic
Traits of the recession phase
Businesses suffering a loss in sales revenue
reducing inventory and cutting back investment
Adds momentum to recession
Inflation
an increase in price levels generally and a decline in the purchasing power of money
Problems of inflation
Fewer people can afford goods
Wage inflation
Exports falling as imports appear cheaprr
Consumers may stock pile fearing price increase
Two types of inflation
Cost push inflation and Demand pull inflation
Cost push inflation
Price rises resulting from an increase in the costs of production of goods and services
Demand pull inflation
Persistent excess of demand over supply
Monetary policy
Government policy on interest rates, exchange rates and money supply
Fiscal policy
Government policy on government spending taxation and borrowing
Expansionary financial stance
Government spending> taxation = increased borrowing
Contractionary fiscal stance
Government spending< taxation = reduced borrowing
Demand curve
Shows the demand at each price assuming that all other variables are constant
Things that determine demand
Price of the good itself Price of other goods Substitutes Complements National income Fashion income distribution
Price elasticity of demand
looks at the degree to which demand is affected by changes in the selling price
PED< 1
Inelastic
Ped> 1
Elastic
PED = 0
Perfectly inelastic
Factors affecting PED
Substitues Time Competitors pricing Nature of the product Proportion of income
Elasticity
Measures the responsiveness of demand to a change in a relevant variable
Inelastic products
increasing the price will increase the total revenue even though fewer units are sold
Giffen goods
Goods that as the price increases they still buy them and then buy more as they can’t afford other goods
Veblen goods
Bought for ostentation, so a higher price makes them more exclusive and desirable
Cross elasticity of demand
Looks at the degree to which demand is affected by changes in price of other products
Supply curve
shows supply at each price assuming all other variables are constant
Things that determine supply
Price of the good itself Price of other goods Price of joint products Cost Changes in technology
Market structures
A description of the number of buyers and sellers in a market for a particular good and their relative bargaining powers.
Perfect competition
Large number of buyers and sellers
Free entry to/exit the market
Free access to perfect information
Homogeneous/identical products
Implications of perfect competition
Single selling price
Suppliers can only sell at the market price
Suppliers only make normal profits
Monopolistic competition
Many buyers and sellers
Some differentiation of products
Some customer loyalty
Few barriers to entry
Implications of monopolistic competition
Firms have some freedom to set prices
Lack of barriers to entry ensure only normal profits in the long run
Oligopolies
Few large suppliers
Differentiation of products
High degree of mutual dependency
Implications of Oligopolies
Difficult to predict the actions of competitors
Price wars
Collusion to form cartels
Monopoly
One supplier
Many buyers
Barriers prevent new entrants
Implications of monopoly
Supplier can fix price or quantity
Firms make super normal profits
Market failure
When a free market fails to produce the optimum allocation of resources
4 types of market failure
Market imperfections
Externalities
Public goods
Economies of scale
Market imperfections
Markets do not satisfy assumption of perfect competition
Externalities
Cost or benefits which the market mechanism fails to take into account because the market only incorporates private costs and benefits
Public goods
Without government intervention some goods would not be provided at all by a market economy
Economies of scale
Results in larger firms making more profit, larger firms pushing smaller firms out of business, reducing choice
What does the CMA do?
Investigates those suspected of breaching competition act
