economics of the market b

Question 1

what is a market?

Answer 1

a market is formed when buyers and sellers of goods, services or recourses come in contact with each other in order to agree a price an exchange
- any arrangement where buyers and sellers are in contact to exchange a product is a market
- markets may be worldwide such as oil, wheat and cotton
- markets may be localised such as the housing market

Question 2

what 4 things do markets exist for

Answer 2

• goods
• services
• resources
• money

Question 3

what is a free market ?

Answer 3

• there are no barriers to firms competing with each other
• the price is set in the market by the total demand and supply: firms have to accept this
• there is no government intervention

Question 4

what is the equilibrium price

Answer 4

• in a free market an equilibrium price willi be established
• quantity demanded by consumers is the same as quantity supplied by suppliers
• the market is cleared there will be no shortages or surplus
• price willi not change unless there is a change in demand or supply conditions

Question 5

draw an equilibrium graph

Question 6

what happens to equilibrium curve when demand changes

Answer 6

• rise in demand rises the equilibrium price and quantity exchanged in the market
• a fall in demand leads to a fall in equilibrium price and in the quantity exchanged

Question 7

what is derived demand

Answer 7

• this is the demand for a factor of production which is used to produce another good or service
• examples include: wood, labour, steel
• draw curve

Question 8

what is joint demand

Answer 8

• joint demand refers to the demand for 2 or more goods which are used jointly or demand together.
• examples include: ink and printers
• draw curve

Question 9

what is competitive demand (substitutes)

Answer 9

• markets where a number of substitutes exist and one goods can be purchased instead of another good
• an example is pork and beef
• draw graph

Question 10

what happens to the equilibrium when there are supply changes

Answer 10

• an increase in supply leda to a fall in equilibrium price and a rise in the quantity exchanged
• a fall in supply lead to a rise in equilibrium price ad a fall in the quantity
  exchanged

Question 11

what is joint supply

Answer 11

• joint supply is where an increase or decrease in supply of one good leads to an increase of decrease in supply of another price
• an example is if there is an contraction in the market supply of lamb then wool supply would also reduce.

Question 12

what is competitive supply

Answer 12

goods and services in competitive supply are alternatives products that a business could make with its factor resources of land labour and capital
- example: diversion of land in supplying food to producing biofuels

Question 13

why would the government intervene in a free market

Answer 13

• to alter the price or the quantity exchanged

Question 14

5 different ways a government may intervene in a market

Answer 14

• setting a minimum price
• setting a maximum price
• imposing tax
• giving a subsidy
• setting a quota

Question 15

why would a government set a minimum price above equilibrium

Answer 15

• they may feel the equilibrium price is too low
• this may create a problem of surplus
• examples: setting minimum price for farm products to ensure farers received a decent income - farmers grew more so there was a surplus
• the surplus can be stored or exported
• setting a minimum price for low paid workers may create unemployment

Question 16

problems with minimum pricing (3)

Answer 16

• higher prices for consumers
• black markets
• over supply leading to allocative inefficiency

Question 17

why would a government set a maximum price below equilibrium

Answer 17

• does as equilibrium price to too high.
• governments do this to help low income earners for anti inflation strategies
• this may create black markets where the price willi be set above the official price
• draw graph

Question 18

what happens when imposing an expenditure tax

Answer 18

• it has the same effect as increasing the cost of production, since suppliers have to pay it to the government. producers will raise their selling price to recover this increased cost. they may absorb part of the cost by taking a reduce profit
• draw curve
• share of the tax burden depends on the proportion which the supplier can pass on tot eh consumer, which depends on how responsive the consumer is to an increase in price