Chapter 2: Microeconomics Flashcards
What is a market?
All those buyers and sellers who influence the price of a particular good or service
What are the conditions for a market to exist?
- There must be at least one potential buyer and one potential seller of a good or service
- Sellers must have a good/service that they are willing to sell
- Buyers must have the means to purchase the goods/services
- Terms of exchange must be agreed on
- Transaction should be formalised
What determines which goods or services consumers buy and how much they are prepared to pay for them?
Value
Utility
Price
What does the concept of value prove?
- Expressed by the amount of money willing to be sacrificed
- measured in terms of monetary units
- determined by satisfaction
What does the concept of utility prove?
- The more benefit consumer finds in consumption, the greater the satisfaction
- Utility is subjective and differs from person to person
What does the concept of price prove?
- Defined by the amount requested or offered to obtain a good/service
- We assume price is equal to value
- people are not forced to buy
- If they don’t buy demand drops, if they buy supply is sustained or increased
What is total utility?
The total benefit or satisfaction that a consumer derives from consuming a good or service
How do consumers spend their money?
In a way that will maximize the total utility they derive
What are markets composed of?
- Buyers and sellers
- product and factor markets
- generic markets
Explain the composition of buyers and sellers
- Buyers as a group determine the demand and sellers as a group determine the supply
- Markets are established by interactions between buyers and sellers
- These interactions can be direct or indirect
Explain the product and factor markets
- Markets for goods and services are called product/goods markets, for factors they are called factor markets
- the demand for the services of factors is derived from demand for products produced by these services
Explain generic markets
- There are world generic markets for wheat, maize coffee etc.
- Each of the markets are interlinked but are also separate
- Like Russian dolls
What are the different forms of markets?
Perfect and imperfect markets
What are the four characteristics by which a market can be identified?
- The number of producers
- The nature of the product
- Barriers to entry
- Availability of information
What is a perfect market?
A market where no supplier is able to manipulate the price
Why can’t the supplier manipulate prices in a perfect market?
- There are many suppliers
- Products are produced by different suppliers and are homogeneous
- There are no barriers to entry, suppliers can enter or exit the market freely
- Complete information is available to producers and consumers about market conditions
Why are suppliers to perfect markets called price-takers?
They operate under condition of perfect markets and cannot manipulate prices of their goods/services
What are imperfect markets?
- Monopoly and oligopoly markets are part of imperfect markets
- prices are determined one-sidedly
Why are prices determined one sidedly in an imperfect market?
- There is only one large supplier of a good or service in a monopoly, only a few large suppliers in oligopoly
- The good or service supplied is unique and has no close substitutes
- Entry into the market is restricted so that new suppliers cannot enter the market
- Producers and consumers have incomplete knowledge about market conditions
What is a third kind of imperfect market?
monopolistic competition
Why are monopolistic suppliers referred to as price makers?
They have complete control over prices they charge
Why has the concept of a market been applied to the world recently?
Because of the advancements of electronics
What has the effect of electronics resulted in?
- It molded the world into a single economic village
- A price change in one part of the world affects price change in the rest of the world
- Goods purchased and delivered come from nearest section on globe
- A product can be forwarded and delivered in different ways
What are futures?!
the prices of goods that are still to be produced
What are the 5 conditions for goods to be suitable for trade in the world
- There must be a wide demand
- It must be transportable
- The cost of transport must be small in relation to the value of the good
- It must be durable
- Entry must not be restricted
What is the purpose of price?
It serves to calibrate demand and supply of a good or service
What is the purpose of demand?
It starts the economic process
What is demand?
The quantity of a good or service that consumers are willing and able to purchase over a given period of time
What are the determinants of demand?
- The price of the good
- The consumers’ level of income
- Tastes
- Other factors
- The prices of other goods and services
What is a substitute good?
A good that can be used in place of another good to satisfy a want
What is a complementary good?
A good that is consumed together with another good to satisfy a want
What is known as the ceteris paribus assumption?
In order to analyse the impact of price on demand, we make the simplifying assumption that all other things remain the same
