Chapter 4 - Micro-economic factors Flashcards
What is a market?
&
What are the three different types?
A market can be defined as a situation in which potential buyers and potential suppliers of a good or service come together for the purpose of exchange.
Three types important for this module are:
- perfect competitive
- Imperfect
- Monopolistic
Name 5 of the characteristics of perfect competition.
What are the consequences of perfect competition?
- Many small buyers & sellers which, individually, cannot influence the market price.
- No barriers to entry, so businesses are free to enter & leave the market as they wish
- Perfect information such that production methods and cost structures are identical.
- Homogenous (identical) products
- No collusion between buyers & seller.
The consequences of perfect competition include:
- Suppliers are ‘perfect takers’ not ‘price makers’, they can sell as much s they want at market determined price.
- All suppliers only ‘normal’ profits
- There is a single selling price.
Define imperfect competition.
What are the 6 characteristics of monopolistic competition?
Imperfect competition is defined as an market structure that does not meet the conditions of perfect competition. An example of this is monopolistic competition.
Monopolistic competition.
- Many buyers and sellers
- Some differentiation between products
- Branding of products to achieve differentiation
- Some customer loyalty
- Few barriers to entry
- Significant advertising
What are the consequences of monopolistic competition?
Consequences of monopolistic competition include:
- Increases in prices cause loss of some customers
- Only normal profit earned in the long run (as in perfect competition)
The market mechanism
The interaction of demand and supply for a particular item.
What is meant by demand?
What is a demand schedule?
What is a demand curve?
Demand is the quanitity of a good that potential purchasers would buy, or attempt to buy, if the price of the goods were at a certain level.
A demand schedule is the ratio of price per quantity of a certain good.
A demand curve is a demand schedule placed on a graph
What factors determine demand?
What can cause a shift in the demand curve?
- Price
- Inter-related goods: substitutes & complements
- Income levels: normal & inferior goods
- Fashion & expectations
- Income distribution
Shifts of the demand curve can be caused by:
- Changes in the goods price
- Changes in any of the other factors which affect demand for a good
Supply
What is meant by supply?
What factors affect supply?
What is the equilibrium price?
Supply is the quantity of a good that existing suppliers or would be suppliers would want to produce for the market of a given price.
Factors influencing supply are:
- Price obtainable for the good
- Prices of other goods
- Prices of related goods, in ‘joint supply’
- Costs of making the good
- Changes in technology
The equilibrium price is the price of a good at which the volume demanded by consumers and the volume businesses are willing to supply are the same.
Price regulation.
What are the two controls governments might use to regulate prices?
Governments might:
- Set a maximum price for a good, perhaps as part of an anti-inflationary economic policy
- Set a minimum price for a good below which a supplier is not allowed to fall
If we consider setting a maximum price:
- If the price is higher than equilibrium price, it will have no effect on market forces
- If the price is lower than equilibrium there will be an excess of demand over supply.
What is price elasticity?
What is the equation to calculate elasticity?
Elasticity is the extent of a change in demand and/or supply given a change in price.
PED = change in quantity demanded, as % of original demand/ % change in price
therefore PED:
= Q2 - Q1 + P2 - P1
Q1 P1
(where Q1 & P1 are the intitial price & quantity; P2 & Q2 are the subsequent price and quantity)
What is the type of elasticity if:
PED < 1?
PED > 1?
PED = 1?
If:
PED < 1 then demand is inelastic
PED > 1 then demand is elastic
PED = 1 then there is unit elasticity
What are the three special values if price elasticity of demand?
The three special values of price elasticity of demand are 0, 1 & infinite
If PED = 1 demand is perfectly inelastic
If PED = infinite demand is perfectly elastic
If PED = 1 the demand changes proportionally to a price change
What are the two positive price elasticities of demand?
What are the 6 factors influencing price elasticity of demand for a good?
Positive price elasticities of demand:
- Giffen goods
- Veblen goods
Factors influencing price elasticity of demand for a good:
- Availability of substitutes
- The time horizon
- Competitors pricing
- Luxuries & necessities
- Percentage of income spent on a good
- Habit-forming goods
What is income elasticity of demand?
Income elasticity of demand is an indication of the responsiveness of demand to changes in household items.
Income elasticity of demand = % change in quantity demanded/ % change in household incomes
When is demand for a good income elastic?
When is a demand for a good income inelastic?
When is demand for a good negatively inelastic?
If income elasticity is greater than 1 the demand for a good is income elastic & these are deemed luxury goods
If income elasticity is between 0 & 1 demand for a good is income inelastic & these are normal goods or necessites
Demand for a good is negatively income elastic where, in response to an increase in income, demand actaully falls. These are inferior goods.
What is cross elasticity of demand?
Cross elasticity of demand is a measure of the responsiveness of demand for one good to changes in the price of another good.
Cross elasticity of demand = % change in quantity of good A demanded* / % change in the price of good B
(*given no change in price of A)
