Markets Flashcards
What are the 2 types of markets?
Factor Markets
Product Markets
What are some solutions to the economic problem?
Allocating resources by the economic system through different types of markets.
- Mixed Market (gov. intervention + laissez-faire)
- Free Market (no government intervention)
- Planned Market (fully operated by the government)
Which type of economic market/s has the key role of allocating resources?
In A Mixed Market economy or Free Market economy, markets are the main allocative mechanism of resources. This occurs through the interaction between buyers and sellers in order to determine equilibrium in which both parties are satisfied.
What is relative price?
The cost of one alternative to another
The higher the relative cost the…..
lower the opportunity cost.
What is individual demand?
The demand of an individual consumer for a good or service.
What is market demand?
The sum of total individual demands for a particular service.
What does “Ceteris Paribus” mean?
All other things/factors remaining equal.
What does the Law of Demand state?
The Law of Demand states the quantity demanded of a good or service varies inversely with its price. As price decreases, demand increases, and vice versa.
This happens as more people are willing and able to pay for the good or service.
What are the 6 factors that affect demand?
- Price
- Income
- Population
- Tastes
- Prices of complementary and supplementary goods
- Expected future prices
How does price affect demand?
As the price of a good decrease, demand for that good is more likely to increase, similarly, as the price of the good increases, demand is likely to decrease. This is per the law of demand, which states the quantity of a good demand varies inversely with price.
A change in price causes either an expansion or contraction on the demand curve. An expansion is caused by a decrease in price and a subsequent increase in demand. A contraction is caused by an increase in price and therefore a decrease in demand.
How does income affect demand?
As income rises, consumers have more disposable income which they can spend on additional goods and services, therefore demand is likely to increase. As income decreases (ie. as a result of recession) there is a decrease in consumption and a subsequent decrease in demand.
This is represented by either a shift to the left or right of the demand curve. When income rises, this increase in demand is represented by a shift to the right, and as income decreases, a shift to the left.
How does population affect demand?
An expansion in population caused by immigration or natural causes will result in an increase in demand, as there are more people requesting more goods and service.
A decrease in population as cause by emigration or famine/other causes will result in a decrease in demand, as there are less people in need of goods and services
As the demographics of the populations changes, ie. population ages, there will be increased demand toward those goods that group is in need of or wants [ie. ageing population = increase in demand in walking sticks]
This is represented on the demand curve by either a shift to the left or the right. The expansion of population and impact on demand will result in a shift to the right, similar to an ageing population. A decrease in population would cause a shift to the left.
How do tastes affect demand?
As consumer taste and preferences change, as do their demands. If something is “trendy” it is likely that that product/service will experience an increase in demand. Similarly, if something is deemed “out of fashioned” or “aged” then the demand for that product is likely to decrease.
This is represented by a shift to the left/right.
How do prices of substitutes and complements affect demand?
If the price of a substitute good rises, the demand for the original good will rise as the demand for the substitute good decreases as less people are willing and able to pay, vice versa.
If the price of a complementary good rises, the demand for the original product will decrease, as less people are willing and able to pay, and vice versa.
Represented by a shift to the left/right of the demand curve. Increase in substitute good = shift to the right, increase in complement = shift to the left.
How does expected future prices affect demand?
If the price of a good is expected to rise in the future, the demand for the good will increase in the short term term. If the price of a good is expected to fall in the future, the demand for the good will fall short term as more people wait it out for the price to drop.
Represented by a shift on the demand curve. Expected future price is higher = shift to the right. Expected future prices lower = shift to the left.
[PIPPET]
What is a way to remember the 6 factors (including demand) that affect demand?
PIPPET
What is price elasticity of demand?
Price elasticity measures the responsiveness of consumer demand for a particular product to a change in price.
What are the benefits of having an awareness of price elasticity for businesses and firms?
- Awareness of price elasticity allows businesses to determine a price at which they can make maximum profit.
- Best pricing strategy and if they can afford a change in price.
- Price changes will generally happen if a good has inelastic elasticity
of demand, this can be determined by market research ie. surveys - Allows the government to determine which goods/services it can tax and how much it can tax them.
What does relatively elastic/inelastic demand mean?
Relatively Elastic demand - refers to a strong response to a change in price. A decrease in quantity demanded is proportionally greater than the rise in price.
Relatively Inelastic demand - refers to a weak response to a change in price. A decrease in quantity demanded is proportionally less than the rise in price.
What does perfectly elastic/inelastic demand mean?
Perfectly elastic demand - refers to a point in which consumers demand an infinite quantity of a good or service at a particular price, but at no other price point.
Perfectly inelastic demand - refers to a point in which the quantity of a product is fixed, and consumers are willing to pay at any price point for this product (ie. limited edition artwork)
What does unit elastic demand mean?
Unit Elastic demand - refers to a proportionate change in quantity demanded which is the same as the proportionate change in price
How do you calculate price elasticity of demand?
We calculate elasticity using the total outlay method. This is calculated using the equation: price×quantity demanded.
What are the 5 factors effecting price elasticity of demand?
- Necessities and Luxuries
- Existence of close substitutes
- Proportion of income spent on that good
- The length of time since a price change
- Whether a good is addictive
How do necessities and luxuries affect price elasticity?
Necessities have a relatively inelastic demand. An increase in price will not cause a change in the quantity demands, ie. food
Luxurys have a relatively elastic demand. A change in price will cause a significant decrease in the quantity demanded
How does the existence of close substitutes affect price elasticity?
Products without close alternatives tend to have relatively inelastic demand as there are no other alternatives to these products.
Products that have close substitutes tend to have highly elastic demand, as there are many alternatives.
How does the proportion of income spent on a good impact price elasticity?
Goods and services that take up a small proportion of income have an inelastic elasticity of demand (ie. chocolate)
Goods and services that take up a large proportion of the income tend to have an elastic demand (ie. cars, houses)
