External environment Flashcards
What is defined
the interaction of demand and supply for a particular item
market mechanism
What is defined
a situation in which potential buyers and sellers of an item or good come together for the purpose of exchange
market
what factors affect demand
price
Interrelated goods (substitutes and compliments)
Income levels (normal v inferior)
Fashion and expectation
Income distribution
What factors affect supply
price
Price of other goods
Price of related goods (joint supply)
Cost of making the good
Changes in tech
What is defined
the price of a good at which the volume demanded by consumers and the sieve are willing to supply are the same
equilibrium price
government intervention - what happens if price set is higher than equilibrium price
nothing - no effect on market forces
Government intervention - what happens if price set is lower than equilibrium price
Excess demand over supply
What is defined
The extent of a change in demand and or supply given a change in price
elasticity
Equation for PED
Proportional change in quantity/proportional change in price
where proportional change is change / original
PED < 1
demand inelastic
PED > 1
demand elastic
PED = 1
unit elasticity
PED = 0
Demand perfectly inelastic - vertical straight line
PED = infinity
demand perfectly elastic - horizontal straight line
PED = 1
Unit elasticity of demand, demand changes proportionately to change in price
factors influencing PED
availability of substitutes
Time horizon
Competitors pricing
Luxuries and necessities
Percentage of income spent on a good
Habit forming goods
What kind of good is described
non luxury targeting low income customers
Giffen goods - positive PED
High quality status related goods where demand increases as price increases
Veblen goods - positive PED
When demand for a good rises as income rises but then falls back as incomes pass a certain point what kind of good
inferior goods
What is defined
indication of the responsiveness of demand to changes in household income
income elasticity of demand
What is equation for income elasticity of demand
% change in quantity demanded/% change in household income
If income elasticity > 1 the good is
luxury, demand income elastic
If income elasticity between 0 and 1
normal goods/necessities - income inelasticy
Income elasticity < 0
inferior goods, demand negatively income elastic
What is defined
a measure of the responsiveness of demand for one good to changes in the price of another good
Cross elasticity of demand
Cross elasticity of demand equation
% change in quantity of A demanded/%change in price of B
If X-elasticity >0 good are
substitutes
If X - Elasticity < 0 goods are
complements
If X-elasticity = 0 goods are
unrelated
What is defined
a measure of the responsiveness of a supply to a change in price
price elasticity of supply
Equation for price elasticity of supply
% change in quantity supplied/% change in price
What kind of market structure
many small buyers and sellers - can’t influence price
no barriers to entry
perfect information
homogenous products
no collusion
perfect competition
What do these describe
Suppliers are price takers
all suppliers earn normal profits
there is a single selling price
perfect competition
What kind of market structure
one dominant supplier
many buyers
barriers to entry
Monopoly
what is described
business can either set selling price or quantity
monopolists earn greater than normal profits
natural monopoly where something about market causes it to happen
monopoly
What market structure is described
many buyers and sellers
some differentiation between products
branding products achieves differentiator
some customer loyalty
few barriers to entry
significant advertising
monopolistic competition
What is described
Increaes in prices cause loss of some customers
Only normal profit earned in long run
monopolistic competition
What market structure
few large sellers many small buyers
product differentiation
mutual interdependency
Oligopoly
what is described
Business compete through non-price competitoin
price cuts usually copied
price increases are not always copied
oligopoly
What market structure is
two dominant suppliers who between them control prices
temptation for two suppliers to act in collusion (illegal in most countries)
duopoly
what is defined
a situation in which a free market mechanism fails to produce the most efficient/optimum allocation of resources
market failure
What arguments are put forward by advocates of the free market
efficient
impersonal
efficient allocation of economic resources
- based on perfect competition
Factors causing market failure
Market imperfection
externalities
public goods and benefits gained by third parties
economies of scale
four factors of production GDP
Land
Labour
Capital
Entrepreneurship
What is define
income available to individuals after payment of personal taxes, it may be consumed or saved
Disposable income
Six influences affecting total spending/consumption by households
Change in disposable income and marginal propensity to consume
change in distribution of wealth
government policy
development of major new products
interest rates
price expectations
What is defined
the continual sequence of rapid growth in GDP followed by a slowdown in growth and then a fall. growth comes again, and when it has reached a peak, the cycle turns once more
business cycle/trade cycle
Four main phases of the business cycle
recession
depression
recovery
boom
What phase of cycle
Capacity and labour become fully utilised, causing bottlenecks in some industries as can’t meet increase in demand
Further rises met by price rather than production increases
Business profitable few firms facing losses
Expectations about future optimistic and high level of investment expenditure
boom
What phase of cycle
consumer demand falls/confidence diminishes
Investment projects already undertaken bein to look unprofitable
Orders cut
Inventory levels reduced
Business failures occur as firms find themselves unable to sell goods
Production, employment and prices fall
recession
What is defined
an increase in price levels generally and a decline in the purchasing power of money
inflation
what is defined
falling prices generally, normally associated with low rates of growth and reecession
deflation
What kind of inflation
Price rises from persistent excess of demand over supply in the economy as a whole. Supply cannot grow any further once full employment of factors of production is reached. Supply can’t go up, prices rise.
Demand pull
What kind of inflation
Increase in cost of production of goods and services from imported raw materials/wage increases then companies will put up prices
cost push
Two main causes of demand pull inflation
fiscal - more gov spending, reduce in taxes
credit - levels of credit increase, expenditure rise
What is defined
government policies on the money supply, monetary system, interest rates, exchange rates and availability of credit
monetary policy
What is defined
government policies on taxation, public borrowing and public spending
fiscal policy
How do government affect overall demand
Monetary and fiscal policy
the government rising interest rates is an example of what kind of policy
monetary policy
What does supply side economics concern
The behaviour of the aggregate supply curve in connection with levels of prices, incomes and employmen
What is defined
any form of state interference with the operation of the free market. this could involve regulating demand, supply, price profit quantity quality entry exit information technology or any other aspect of production and consumption in the market
regulation
What is defined
systems or departments in businesses which ensure that people are aware of and take steps to comply with relevant laws and regulations
regulatory compliance
Four responses to regulation
entrenchment o practice (non response)
mere compliance (pass cost to customer)
Full compliance (change product/services)
innovation
What are quotas
limits on output so output is set at the social optimum
What is the benefit of anti monopoly enforcement
deters firms from engaging in collusion, price fixing and deceptive advertising
Why is anti monopoly legislation undertaken
to promote competition and market regulation is undertaken to compensate for lack of competition
Is restricting technical developments an offence under chapter 1 of competition act 1998
No - abuse of dominant position - Chapter 2
