functions of price mechanism and in context of different market types

Question 1

What is the assumption made by Orthodox or Classical economic theory about firms?

Answer 1

Firms are profit maximisers

Question 2

What happens to the profit margin when the price of a good/service rises?

Answer 2

The profit margin increases

Question 3

What is one effect of rising prices on firms in an industry?

Answer 3

Incentive to shift resources towards production or attract new firms

Question 4

What occurs when prices fall for a good/service?

Answer 4

Firms may move resources away from production or exit the industry

Question 5

What role does the incentive function play in firms’ efficiency?

Answer 5

Encourages firms to invest in new technologies and production techniques

Question 6

How does price serve as a rationing device?

Answer 6

Prices ration scarce resources when demand outstrips supply

Question 7

What happens to the price when there is a shortage of a product?

Answer 7

The price is bid up

Question 8

What is ‘effective demand’?

Answer 8

Willingness and ability to pay for a good/service

Question 9

What does consumer sovereignty ensure?

Answer 9

Allocative efficiency is achieved

Question 10

What occurs when demand falls for a product like DVD players?

Answer 10

The price reduces, signaling firms to decrease supply

Question 11

What does a rise in the market price of computer games indicate to suppliers?

Answer 11

A signal to expand output to meet higher demand

Question 12

What are the three functions of the price mechanism?

Answer 12

• Signalling function
• Rationing function
• Incentive function

Question 13

What does the signalling function help determine?

Answer 13

Where and how resources should be allocated

Question 14

What happens to prices when demand exceeds supply?

Answer 14

Prices are bid up to ration goods/services

Question 15

When prices are high, what does this attract?

Answer 15

Producers into the market in search of higher profits

Question 16

Fill in the blank: Prices adjust to demonstrate where resources are _______.

Answer 16

[allocated]

Question 17

True or False: Falling prices create an incentive for firms to increase production.

Answer 17

False

Question 18

What does a rightward shift of the demand curve lead to?

Answer 18

Movement up or extension of the market supply curve

Question 19

What effect do more rules and regulations have on landlords?

Answer 19

They make letting properties more arduous, decreasing the supply of rented accommodation.

Examples include landlord’s gas safety certificates.

Question 20

How does the expected price increase of gold affect property demand?

Answer 20

It makes gold a more attractive investment, increasing its demand and decreasing the demand for property.

This can lead to a reduction in the supply of rented accommodation.

Question 21

What is the impact of higher income tax rates on landlords?

Answer 21

They take a bigger slice of landlords’ income, making landlords less willing to let properties.

Question 22

What factors drive demand in the owner-occupied housing market?

Answer 22

The key factors are:
* Mortgage interest rates
* Government schemes like Help To Buy
* Speculation

Question 23

What determines mortgage interest rates?

Answer 23

They are determined by the Bank of England and market interest rates, including LIBOR.

Question 24

What is Quantitative Easing?

Answer 24

A process where the Bank of England creates digital money to stimulate demand.

Currently stands at £6.5 trillion in the UK.

Question 25

What happens in a Bull market regarding housing?

Answer 25

If house prices are rising, the demand for housing increases.

Question 26

What happens in a Bear market regarding housing?

Answer 26

If house prices are falling, the demand for housing decreases.

Question 27

How do planning laws affect housing supply?

Answer 27

The harder it is for builders to secure planning permission, the more difficult it is to increase housing supply.

Question 28

What is the Green Belt?

Answer 28

A protected strip of rural land surrounding major towns and cities to prevent urban sprawl.

Question 29

What is the impact of building techniques on housing supply?

Answer 29

Traditional construction methods take longer, making supply less sensitive to price changes compared to modern techniques.

Question 30

What factors affect the costs of production in housing?

Answer 30

They include: * Costs of raw materials * Availability of skilled labor

Question 31

How does the availability of mortgages affect the rental supply?

Answer 31

If banks are less willing to lend, the supply of rented properties decreases.

Question 32

What is the relationship between housing prices and rental demand?

Answer 32

The more expensive it is to buy a house, the higher the demand for rented accommodation.

Question 33

What is the Bank Rate?

Answer 33

The interest rate set by the Bank of England at which it lends to other banks.

Question 34

What drives the demand for housing generally?

Answer 34

The size of the population and living arrangements.

Question 35

Fill in the blank: The housing market consists of two sub-markets: the Rental market and the _______.

Answer 35

Owner-Occupied market.

Question 36

What are commodities?

Answer 36

Goods in their raw, unprocessed form.

Question 37

What are soft commodities?

Answer 37

Cultivated agricultural products or 'wild' products such as seaweed or fish.

Question 38

What characterizes the demand for soft commodities?

Answer 38

Price inelasticity due to being necessities with few close substitutes.

Question 39

What affects the supply of soft commodities?

Answer 39

Supply is price inelastic and can be severely affected by bad weather.

Question 40

What are hard commodities?

Answer 40

Products extracted from the ground, including tin, gold, copper, aluminum, and crude oil.

Question 41

How is the supply of hard commodities characterized?

Answer 41

Price inelastic due to high costs and time involved in extraction.

Question 42

What exacerbates price volatility in commodities markets?

Answer 42

Actions of speculators and exchange rate changes.

Question 43

What is the stock market?

Answer 43

The market for buying and selling stocks, representing ownership in companies.

Question 44

What is a stock?

Answer 44

A form of debt or IOU issued by companies or governments.

Question 45

What are ordinary shares?

Answer 45

Shares issued by companies that carry ownership and voting rights.

Question 46

What are the two forms companies can take?

Answer 46

* LTD (Private limited company) * PLC (Public limited company)

Question 47

What does 'limited' refer to in a limited company?

Answer 47

Limited liability, meaning shareholders' losses are limited to their investment.

Question 48

What are the two main objectives of ordinary shareholders?

Answer 48

* Investment in share value * High (and sustainable) dividend income

Question 49

What drives the objectives of ordinary shareholders?

Answer 49

Net profit (total revenue minus total costs).

Question 50

What happens to share prices if company profits rise?

Answer 50

Share prices are likely to rise as higher profits may lead to higher dividends.

Question 51

What determines the share price in the stock market?

Answer 51

The demand and supply of shares.

Question 52

What happens to demand for shares if investors believe profits will decline?

Answer 52

Demand shifts to the left.

Question 53

What is an exchange rate?

Answer 53

The price of one currency in terms of another.

Question 54

What are the two types of exchange rate systems?

Answer 54

* Fixed * Floating

Question 55

What determines a floating exchange rate?

Answer 55

Free market forces of demand and supply.

Question 56

What effect do higher domestic interest rates have on the exchange rate?

Answer 56

They attract foreign investment, increasing demand for the currency and appreciating the exchange rate.

Question 57

What can cause depreciation of a currency?

Answer 57

Factors like reduced attractiveness for foreign investment or increased tariffs.

Question 58

What is the impact of net trade on currency demand?

Answer 58

Increased competitiveness of exports can lead to greater demand for the currency, appreciating its value.

Question 59

Fill in the blank: The supply of shares in the short-run is assumed to be _______.

Answer 59

fixed