Chapter 2 - An introduction to microeconomic and the role of markets Flashcards
Microeconomics
Looks at the behavior of individual economic agents that make up the whole economy.
Three conditions required for a perfect market:
- Large amount of buyers and sellers. No individual buyer or seller has the market power to influence prices, thus leading to price taking.
- Products being sold are homogenous and easily substitutable. This encourages suppliers to offer the lowest possible price as their method of gaining a competitive advantage and attracting customers.
- Ease of entry and exit into the market. Low set up costs in the industry, meaning that profit making opportunities exist.
Law of demand
Inverse relationship between the price and quantity demanded.
Income effect reflects the law of demand as prices increase, less people are able to afford it, thus less demand, buyers may also look to purchase substitute items that are cheaper, this is known as the substitute effect.
Demand side factors affecting price and quantity:
- Disposable income. The rewards received by households from their direct contribution and indirect contribution to the production process, plus government transfers less direct taxes.
- Complementary goods
- Price of Substitutes
- Preferences and tastes
- Interest rates
- Consumer confidence
Law of supply
Linear relationship between the price and quantity supplied.
A firm will supply more if it thinks that it can get a higher profit for it.
Difference between a movement and shift:
A movement occurs when a products price changes.
A shift occurs when other factors have changed.
Supply factors influencing price and quantity
- Changes in the cost of production
- Technological change and productivity growth
- Climatic conditions
Equilibrium price
The price where quantity demanded is equal to the quantity supplied. The market will always have a natural tendency to move towards the equilibrium due to market pressures.
Resource allocation
The study of how factors of production such as land labour and capital are directed towards the production of goods and services to meet the needs of economic agents.
Relative prices
The price of any one good or service measured in terms of the price of another good or service. It is a measure of opportunity cost as the relative price of one good can be expressed in terms of what is given up to obtain the other.
Price mechanism
How the forces of demand and supply determine relative prices of goods and services, which then ultimately determine the way our resources are allocated in an economy.
Market mechanism
The primary method by which many countries around the world allocate resources, it is seen as the most affective way to boost living standards.
