Exam Revision Flashcards
Product Market
Buying and selling of finished goods.
Factor Market
Buying and selling of factors of production
Market Economy
- Price Mechanism
- Private Property Ownership
- Economic Freedom
- Economic Incentive to take part in activity
- Consumer Sovereignty
Competitive Market
- Large number of firms
- Firms are price takers
- Very similar products
- Ease of entry
Non-competitive Market
- Small number of firms
- Product differentiation
- Firms are price setters
- Entry is restricted
Law of Demand
The higher the price, the less quantity is demanded, and vice versa.
Individual Demand Curve
Refers to the quantity of a product by a single consumer at any given price.
Market demand curve
Includes the individual demands of all participants in the market.
Factors Affecting Demand
- Price
- Income
- Population
- Tastes and preferences
- Prices of substitutes and complements
- Expected future prices
Change in price on demand curve
Demand decreases; movements along the curve occur.
Non-price factors factors affecting demand
Can either increase or decrease
Law of Supply
The lower the price the less supplied, the higher the price, the more supplied.
Factors affecting Supply
- Price
- Cost of production
- Factors of production
- Expected future prices
- Number of suppliers
- Technology
Non-Price factors affect market Supply
- Technology: Increase
- Input Costs: Increase
- Government Regulations: Decrease
Market Equilibrium
When quantity demanded equals quantity supplied.
Concept of Market Clearing, shortages, surplus.
Shortages: When there is more demand than supply, buyers will have to compete to buy the product.
Surplus: More supply than demand, cheaper prices.
Price Mechanism
See bottom of page 34 in study guide for diagram and explanation.
Price Elasticity of Demand (PED)
Measure of the response or reaction in quantity demanded to a change in price of that product.
PED= Percentage change in quantity demanded/percentage change in price.
Determinants of PED
- Importance of product
- Whether or not substitute products are available
- Definition or scope of the market
- Time to respond
- Proportion of income spent on product
Price Elastic & Price Inelastic
- Price Elastic: A small change in price, causes a large change in demand.
- Price Inelastic: A large change in price, causes a small change in Demand.
Link between PED and total revenue
When price is changed and Demand is elastic, the total revenue will decrease, as consumers are less inclined to buy a product as their Demand is elastic.
Income Elasticity of Demand (YED)
YED measures the response of quantity demanded to a change in income.
YED= %change in quantity demanded/% change in income
Normal and Inferior Goods
When income is low, the quantity of inferior goods demanded will increase. When income is high inferior goods become unwanted and demand rises for normal goods.
Cross Elasticity of Demand (XED)
A measure of the response in demand for a product when the price of a related or linked product changes. It can measure how sensitive demand for apples is if there is a change in price of oranges.
Value of Substitutes and complimentary goods in relation to XED
Substitutes - Cherry Ripes and Kit Kats
Complementary - Petrol and Cars
Price Elasticity of Supply
Impact of changes in the price of the product on the quantity of a product supplied to the market.
Elastic and Inelastic Supply
Elastic: Supply of a good or service that increases or decreases as the price of an item goes up or down.
Inelastic: A situation in which any increase or decrease in the price of a good or service does not result in a corresponding change in its supply.
Determinants of PES
- The short run: One factor is fixed
- The long run: All resources is fixed, but no new tech is available.
- The very long run: All factors can be varied
- Technological complexity
- Mobility of resources
- Ability to hold stocks or inventories
- The amount of unused capacity
- Does Supply rely on an external factor
Significance of Price and Income Elasticity for consumers, businesses and Governments
They may want to encourage the use of merit goods such as public transport by providing a subsidy or discouraging the use of demerit goods such as ciggs, cool drinks and cars by installing a tax. Although this will be more successful where price is elastic.
Market Efficiency
Belief that market economies generate economic efficiency.
Consumer Surplus
Everybody that buys something gets a bonus because the benefit or pleasure they receive is greater than the price they have to pay for it.
Producer Surplus
When a producer gets a bonus because the money they receive for a sale is greater than its production cost.
Maximising Welfare
Consumers and producers opt out of a market when they don’t get their bonus. When market equilibrium quantity is reached this occurs.
Market Failure
Situations where markers do not maximise welfare
Competitive & Imperfect Markets
Competitive Market:
- Large number of firms
- Firms are price takers
- Very similar products
- Ease of entry
Imperfect Market: Oligopolies and Monopolies
Under & Over production = Deadweight loss
Prices may be set above or below the equilibrium or clearance price, therefore not operating at most efficient point, thus deadweight loss occurring.
Market Power
One or more producers have monopoly power in a market.
Barriers of Entry
Structural Barriers: Supermarkets buying power over suppliers, access to cheaper finance, specialisation, agglomeration.
Strategic Barriers: Control of Supply, brand loyalty, anti-competitive, predatory pricing, bundling, tacit collusion.
Legal Barriers: Government regulation, protection of intellectual property.
Market Power leading to deadweight loss
See page 85 in study guide for graph.
Role of ACCC in ensuring efficiency.
The act provides general protection, such as protection against misleading advertisements. Concentrating on behaviour that is anti-competitive such as market sharing arrangements, third-line forcing, predatory pricing, boycotts, resale price maintenance.
Policy options to influence market Power
Informing consumers with websites that close information gaps.
Positive v Negative Externalities
Positive Consumption: Consumption creates benefits for people not directly involved in making that Consumption decision
(E.g. Flu vaccinations and education)
Positive Production: Production or a product reduces cost for people not directly involved in making that production decision.
(E.g. Training workers, renewable resources to produce energy)
Negative Consumption: Consumption imposes loss of benefits for people not directly involved in making that decision.
(E.g. using mobile phone when driving, smoking in public)
Negative Production: Production imposes loss of benefits for people not directly involved in making that decision.
(E.g. using fossil fuels for electricity, musical festivals)
Externalities influence market efficiency
See page 91 of study guide for diagrams.
Policy options to correct externalities
Positive Consumption: Provide a subsidy to consumers, government provides free or at a reduced cost.
Positive Production: Pay producers a subsidy, allow gains from the sale of permits.
Negative Consumption: Tax consumers.
Negative Production: Encourage corporate social responsibility, regulate to cut bad behaviour, tax producers.
Public Good & Common Resource
Public Good: Non-rival, Non-excludable
(E.g. Lighthouses, streetlights, national defence systems.)
Common Resource: Rival in Consumption, non-excludable
(E.g. Forests, fish in the ocean, the atmosphere.)
Free Rider Problem
Non rival, non excludable characteristics mean they are not demanded or supplied. Without demand or supply a price can not be set, with a glut of free riders there is no incentive to reply because won’t make profit.
Tragedy of the Commons
Refers to the dilemma where many individuals acting on their own accord can destroy a shared resource.
Policies to reduce market failure associated with public goods and common resources
- Regulate the use of common resources
- Assign or sell property rights to private owners
- Establish a “cap and trade” parallel market, such as an emissions trading scheme.
- Educate people about the dangers of overuse.
Effects of Tax on a market
Indirect taxes cause the market Supply curve to shift upwards by the amount of tax, effect depends on the relative values of PED and PES
Effect of Subsidies on a Market
No positive externalities, will move Market away from equilibrium, and cause deadweight loss.
Price Ceiling & Floors
Ceiling: Maximum price control creates a price ceiling.
Floor: A price above the market equilibrium level.
