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Prelim Economics > Markets > Flashcards

Markets Flashcards

1
Q

Identify factors that cause a decrease in supply.

A
  • Decreased price of substitute goods
  • Certain technology no longer available
  • Increased cost of FOP
  • Decreased quantity of all resources available
  • Regulations restricting sales
  • Climatic and seasonal influences
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2
Q

Differentiate between a contraction in demand and a decrease in supply?

A
  • Contraction in demand is a decrease in the price of a good lowering demand
  • Decrease in supply is a decrease in factors other than the price itself
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3
Q

Differentiate between the Law of Demand and Law of Supply?

A
  • Law of Demand: increase the price while decreasing quantity demand (more expensive the good, the more sales decrease)
  • Law of Supply: increase price in certain products, increase in supply (more profitable a good means an increase in supply by increasing production)
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4
Q

Identify 5 factors that cause an increase in demand?

A
  • Price of other goods and services
  • Expected future prices
  • Consumer taste and preference
  • Consumer income
  • Size and age distribution of population
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5
Q

Outline factors that influence elasticity of supply?

A
  • Time lags after price change
  • Ability to hold and store stock
  • Excess capacity
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6
Q

Explain the ways the Government can intervene in the market?

A 
• Price Intervention  (price ceiling and price floor)
• Quantity Intervention
  - Externalities
  - Market-based policies
  - Legislation
  - Govt provision of goods + services
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7
Q

Explain reasons for Government Intervention in the market and how they do it.

A

1) Equilibrium price may be too high for merit goods/too low for demerit goods
2) Social costs arise from production/consumption (positive externality)
3) Social benefits (negative externality)
4) Goods not produced by the private sector (public goods)
5) Goods not produced in enough quantity (community + merit goods)

Addressed by:
Setting price ceiling (max price for a product to be sold at) and floor (minimum price product can be sold at)

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8
Q

Explain how the market will return to equilibrium following an increase in demand?

A
  • Increase in demand causes the level of demand to be higher than the supply
  • Consumers bid up prices of products (as price rises, demand falls)
  • Equilibrium price at a higher level
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9
Q

Explain how the market will return to equilibrium following a decrease in demand?

A
  • Excess supply to build up
  • Firms will decrease prices to clear excess stock, contract in the supply
  • As price falls, demand increases
  • New equilibrium lower than before
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10
Q

Explain how the market will return to equilibrium following an Increase in supply?

A
  • Surplus of supply
  • Firms decrease the prices of products
  • Demand increases as the price lowers
  • New equilibrium at a lower level
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11
Q

Explain how the market will return to equilibrium following a decrease in supply?

A
  • Shortage of supply
  • Consumers will bid up prices, causing contraction in demand
  • Suppliers supply more at a higher price
  • Equilibrium higher than before
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12
Q

What is the Law of Demand?

A

Ceteris paribus, the higher the price of a good, the lower the quantity demanded

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13
Q

How does the Law of Demand occur?

A
  • Substitute effect

* Income effect

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14
Q

When does the movement along the demand curve occur?

A

Arise from only changes in the price itself

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15
Q

What is the Expansion of Demand?

A

When the price of the good falls, quantity demand increases

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16
Q

What is the Contraction of Demand?

A

When the price of the good rises, quantity demand falls

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17
Q

When does the movement of the demand curve occur?

A

Result from any change other than a change in the price of the good itself

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18
Q

What are the factors that affect the Elasticity of Demand?

A
  • Whether the good is a luxury or a necessity
  • Whether the good has any substitute goods
  • Whether the good is habit forming
  • The expenditure on the product as a proportion of income
  • The length of time subsequent to a price change
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19
Q

What is Perfect Inelasticity and provide an example?

A

• Regardless of change to price, quantity demand will not charge e.g. insulin

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20
Q

What is Perfect Elasticity and provide an example?

A

• Demand will only occur at one price e.g. minimum wage

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21
Q

Define the Law of Supply?

A

• Ceteris Paribus as the price of a certain product rises, the quantity supplied by producers will rise.

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22
Q

Why does the Law of Supply occur?

A
  • Existing firms – more profitable to produce the good (Production Increase)
  • Attract new producers into the market
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23
Q

When does the movements along the supply curve occur?

A

• Ceteris Paribus, any change in the price of the good itself will lead to a change in the quantity supplied in the same direction as the price changes.

24
Q

What does the Elasticity of Supply measure?

A

• Measures the responsiveness of the quantity supplied of a product to change in price

25
Q

What is the Price Mechanism?

A

• The interplay between demand and supply to establish the price of a good and quantity of the good at that price.

26
Q

How does price mechanism attempt to solve the economic problem?

A

Through interaction between demand and supply, the market will determine which goods/services are produced and at what quantity, hence where resources are located. Thus, addresses the economic problem of scarcity of resources to unlimited wants.

27
Q

How do governments combat negative externalities?

A
  • Govt imposes a tax on producers
  • Cost considered by suppliers when producing product
  • Cause a decrease in supply
  • Consequent increase to equilibrium price
  • Reduction in quantity sold in the market
  • Reduces social costs that arise from production or consumption of a good
  • Excluded by price mechanism
28
Q

What is a positive externality and how can the government encourage it?

A

• Benefit to society that will arrive from consumption or production of a good
• Considered by price mechanism
1) Govt will provide a subsidy (cash payment)
a. To encourage more consumption and production
2) Subsidy can pay for some of production costs for suppliers
a. ↑ in supply
b. More being produced for lower price
c. More quantity used in market

29
Q

What is a Price Ceiling?

A

The maximum price that can be changed

30
Q

What is the purpose of market based policies?

A 
• Govt intervention to address market failure
• Intervene with price mechanism
         ○ Internalise social costs
         ○ Social benefits
• Taxes and subsidies
31
Q

What is a Price Floor?

A

The minimum price that can be charged

32
Q

What are the price intervention methods and when do they occur?

A
  • Price Ceiling - occur when market price is too high

* Price Floor - occur when market price is too low

33
Q

What is legislation and why is it used?

A
  • Laws, regulations and policies set out by government
  • Exists to address market failure and reduce negative externalities
  • Example: The banning of illicit drugs help to reduce social costs.
34
Q

What are the outcomes for a Price Ceiling?

A
  • Reduce price

* Create quantity shortage

35
Q

What are the characteristics of a public good?

A
  • Non excludable
  • Non rival
  • Not produced by private market
  • Govt will supply
36
Q

What are the characteristics of a community/merit good?

A
  • Private sector may not supply enough as it is largely unprofitable
  • Govt must also supply directly
37
Q

What are the outcomes for a Price Floor?

A
  • Increase price

* Create excess in quantity

38
Q

What is competition in an economy affected by?

A
  • Market structure – number and relative size of firms in industry
  • Nature of product being sold
  • Ease in which new firms can enter industry
39
Q

What are market based policies?

A

Govt. intervention to address MF where they intervene within PM to internalise social costs (neg extern.) and social benefits (pos extern.) that arise from production or consumption of goods.

40
Q

What quantity intervention strategy can the government take when the market quantity is too high?

A

Taxes or Regulation

41
Q

What quantity intervention strategy can the government take when the market quantity is too low?

A

Subsidies

42
Q

What quantity intervention strategy can the government take when the market does not provide goods and services?

A

The Govt. provides the goods and services

43
Q

What are the outcomes of using taxes and regulations?

A
  • Increase equilibrium price

* Reduce equilibrium quantity

44
Q

What are the outcomes of using subsidies?

A
  • Reduce equilibrium price

* Increase equilibrium quantity

45
Q

How can the government afford to provide goods and services?

A

Govt. collects tax revenue to finance supply of public goods

46
Q

What are the characteristics of pure competition?

A
  • Many small buyers, none with market power
  • All firms sell same product
  • No barriers to entry
  • No restrictions on quantity
  • Firms are price takers
47
Q

What are the characteristics of Monopolistic Competition?

A
  • Many small firms
  • Product differentiation
  • Firms have some degree of price setting power
  • Some barriers to entry such as brand loyalty
48
Q

What are the characteristics of an oligopoly?

A
  • Small amount of large firms, hold significant share of market
  • Sell similar but differentiated products
  • Significant barriers to entry
49
Q

What are the characteristics of a monopoly?

A
  • Only one firm selling product
  • No close substitutes
  • Big entry barriers
  • Monopolist is price setter
50
Q

What is the substitute effect?

A

When the price of a good rises, the substitute good remains constant, people buy less of that good and more of the substitute.

51
Q

What is the Income Effect?

A

Goods whose price has increased, and income remains constant, the good with increased price is bought less or not bought entirely.

52
Q

What is the elasticity of demand and explain how the total outlay method can work out the relative ‘elasticity’ of a good?

A

• Elasticity of demand is how responsive demand is after a price change.
• Total Outlay Method is a method of calculating the relative elasticity of a good (Price x Quantity Demand)
o Relatively elastic - P+R move in same direction after change
o Relatively inelastic - P+R move in opposite direction after change
o Unit elasticity - change in P but no change in R (QD will not change enough to impact R)

53
Q

Explain why knowing the elasticity of demand is important for firms and governments.

A
  • Governments want to know how certain goods/services react to price changes in order to form government policies such as taxation or subsidies.
  • Taxing inelastic demand will earn the government more revenue while reducing tax on elastic demand.
54
Q

Differentiate between the sectors of the economy that demand and supply when referring to:

a) A factor market
b) A product market

A

a) the factor market is the market for any input into the production process (FOP). When there is high demand, there is an increase in demand for FOP e.g. labour. (D+S determine price paid for FOP)
b) the product market is the interaction between demand an supply of the outputs of production (G+S)

55
Q

Define a negative externatlity

A

Negative Externalities are social costs that arise from the production or consumption of a good and are not taken into account by the price mechanism

56
Q

What is an example of a monopoly in the Australian Economy

A

Sydney Waters and Sydney Trains

57
Q

What is market failure?

A

When the economy experiences severe inflation or high unemployment during fluctuations in the business cycle.

Prelim Economics (7 decks)

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