Markets Flashcards
Function of market?
What happens/goes on? Example?
Allocate scarce resources
Each buyer/seller exchanges something they have for something they’d prefer to have instead
Labour for salary - if rational, eco’ists assume tht worker would choose wages but less spare times & employers would pick employee/work potential over money/wage they give them
Mixed economy:
Combines free markets & Gov.
Planned economy?
Gov. decides allocation of resources e.g. North Korea
Free Market?
Supply/demand & price mechanism allocates resources = any prices
Pros of free market economy? (3)
Efficiency - any product can be bought/sold = only those of best value will be in demand so firms have incentive to make goods as efficiently as poss.
Entrepreneurship - rewards for good ideas e.g. new/improved prods = profit = encourages risk-taking & innovation
Choice - incentives for innov. => more choice for cons.
Cons of free market economy? (3)
Inequalities - huge diffs in income = unfair
Non-profitable goods may not be made e.g. medicine for rare med. conds. - not enough sold/profit = no incentive
Monopolies - successful businesses can become only supplier of prod - market dominance
Market failure =? Example? Solution + examples (3)?
When free markets result in undesirable outcomes e,g. traff cong.
Gov. intervention to correct - changing law/tax breaks/other incentive
+ buy/provide g/s
Mixed economy consists of?
*?
Public (Gov.) & Private sector (privately-owned businesses)
Never purely free market eco with no gov. intervention
Positive statements?
Example?
Important in economics because..?
Objective state’s that can be tested by referring to av. evid.
Less income = more shopping in pound shops
Way of testing whether eco ideas are correct/’testable’
Normative statements?
Example?
Important in eco because..?
Subjective + cont. value judgments - opinions
Pensions should be higher = agree/disagree? not true/false?
Value judgements influence eco decision-making & gov. policy
PPFs show? Below? Above?
Max. Poss. Output - what’s poss. using partc. level of res. e.g. partc. no. of people/capital & raw mats
Productively inefficient - with current level of resources, could build of 1 Good without giving up other Good production
Not achievable at current level of resources = extra/better resources needed
Trade off? (3)
When you have to choose between conflicting objectives because you can’t achieve all your obj’s same time
Compromising & aiming to achieve each obj. a bit
To do more of 1 = less of other
Opportunity cost?
Next best alternative you’re forced to give up So trade-off = opp. cost
What causes movement along PPF?
Reallocation of resources - fixed level of resources
What causes shifts in PPF? Examples of both? (2) Why?
Total amount of resources changing = PPF shifts inwards/outwards
Improved tech/improvements to labour e.g. training = outwards because more output prod. possible using same resources
Fewer total resources available e.g. nat. disaster - PPF shifts inwards = negative eco growth
Outward shift represents..?
Economic growth
*Sometimes PPF shifts…?
Only in one direction - stretches hoz/vert.
Poss. output grows but only helps prod. of 1 good
Eco agents’ Objectives?
Different eco agents e.g. producers/cons/gov = diff. eco objectives - max. something e.g. profit
Producers - eco objs?
Why? (3)
Firm’s profit calc. =?
*Other? (2)(2 e.gs) Why?
Assumed to want profit
Profit = firm can survive (loss/failure = eventu. close)
Allows to offer better rewards to owners/shareholders/staff
+ Re-invest in business for more future profits
Total rev minus total costs
*May want to maximise other quantities inst. e.g. total sales/firm’s market share
Bigger firms = oft. consd. more stable = attract best employees
Larger market share = monopoly power = can charge higher £’s due to lack of compt.
Ethical objectives e.g. help local economy - so buy from nearby supplier even if cheaper elsewhere
Consumers’ eco obj?
*? But?
Also*?
Assumed to want to max. satisf. while leaving within their means/not more than income
Satisf = security e.g. large pension contributions/spend on fast cars/holidays
But we assume they act rationally/for themself
Can also act as workers - who want to max. income while having as much free time as they need/want
Governments’ eco obj? Eco’ists?
This means?
Try to balance resources of country with the needs & wants of the population i.e. eco’ists assume govs want to max. “public interest” by achieving 4 eco objs
= Competing objs - policies helping 1 obj might make it more diff, to achieve another e,g, gov. spending may create more jobs but higher inflation?
Specialisation leads to? (2)
Overall adv?
Division of labour (type of spec’tion)
Production split into diff tasks + specific people allocated to each = economy can prod more stuff if people + firms specialise (+countries/regions e.g. tech comps based in Cali)
Advantages of specialisation? (4)
People can spec. in what they’re best as + can improve
= Better quality & higher quantity of prods for same amount of effort overall = increased labour of prod’vity
Spec = one way in which firms can achieve economies of scale e.g. production line
Spec. => more efficient prod’tion = helps scarcity prob. - resources used more efficient = more output can be prod. per unit of input
Disadvantages of specialisation? (3)
Workers = repititive tasks - boredom
Countries = less self-sufficient = probl. if trade is disrupted (e.g. war/dispute) e.g. country could specialise in manufact. so fuel’s an import = whole country in prod. if falls out with fuel supplier
Lack of flexibility e.g. if company moves, workforce left behind = struggles to adapt/dev. new skills e.g. coal mines - non-transferable skills (=structural unemplyoment incr.)
Trade adv.? Why is it so imp? (2) How?
Everyone can buy stuff they’re no longer making themselves
Specialisation makes trade abs. vital - economies (+ indvs + firms) have to be able to obtain what they’re not making themselves
= Necessary to have way of exchanging g&s between c’s Swapping goods = one way country can get what it wants
Most efficient way = money/exch. rate. Money = medium of exchange - both buyer/seller values
Production? (2)
Manufacturing something in order to sell Converting inputs (e.g. raw mats/labour) -> outputs (selling goods)
Inputs? (2) Outputs?
4 FoPs - land/labour/capital/enterprise
Tangible - raw mats/machines + Intangible - ideas/talent/knowledge
Should have exchangeable value (to be sold)
Productivity? (2)
Explanation?
Worked out..? *
Output per Unit of Input Employed
Way of measuring how efficiently company/economy is producing its output If 1 company could take same amount as inputs/FoPs as another but produce more/greater output => greater prod’vity
Could work out overall level of prod’vity (4 FoP’s) as well as any 1 of 4 e.g labour
*Improving 1 FoP prod = increases overall prod’vity
Labour Productivity?
Formula?
Useful for?
Improvements could be result of..? (4)
Output per worker/Output per hr worked
Amount of output prod. in partc. time ÷ total no. of workers/total hours worked by all
Comparing workers against others
Improvs in lab. prod. could be result of of better training/experience/imprv. tech /specialisation - each worker conc. on performing tasks they’re good at/practised a lot/trained = able to prod. more than doing lots of diff tasks
Productive efficiency?
On graph?
Calc. by?
Outputting desired amount of g/s for lowest avg cost of production
Occurs at lowest point on avg cost curve
Total cost ÷ Output;
Graph shows?
At diff points? (3)
Average cost curve = shows how firm’s avg costs of prod. changes as firm’s level of output varies (prod. more/less good)
v. low levels output = high avg cost
level output increases (as firm takes advg of ecos of scale) = firm’s avg cost of prod. falls = firm more efficient
if level of output cont. to increase, firm’s avg of prod = starts to incr. again (diseconomies of scale)
PPF?
Why?
To be prod. efficient, economy must be producing on PPF
Only achieved when waste is eliminated from prod. process - on PPF = working without wasting resources
Economies of scale? (3)
Types?
Cost advantages of production on a large scale
Avg cost to firm = high if not much is made
Make more = avg cost of each falls because of ecos of scale
Internal & External
Internal economies of scale?
(5)
Changes within firm
Technical economies of scale
Purchasing ecos of scale
Managerial ecos of scale
Financial eos
Risk-bearing eos
Technical economies of scale? (3*4)
Production line methods (by large firms) = lots at low avg. cost
Large firms = purchase other specialised equipment to reduce avg costs
Workers - specialise = more efficient (large firms usu.)
Law of measured dimensions
building new warehouse, price = total area walls&roof. if you make dims twice as big, total area=4 times as much so cost = 4ice. *but volume = 8times = more storage space for each ££
Oil tankers - bigger = reduce cost of transp’ing each unit oil
Purchasing economies of scale? (2)
Large firms making lots of goods = need large quants raw materials => negotiate discounts with suppliers
+ Suppliers’ costs = lower if deliver large amounts e.g. fuel, driver - smaller cost per unit
Managerial economies of scale? (2)
Large firms = able to employ specialist managers to take care of diff. areas of business e.g. finance, cust. service = spec. managers gain expertise & experience in spec. area of business = better decision-making abilities in that area
+ no. of managers needed = doesn’t depend directly on amount goods produced e.g. firm won’t need twice as many managers to prod. 2ice many goods = reduces mang’ment cost per unit of unit [labour prod]
Financial economies of scale?
Larger firms = can often borrow money at lower rate of interest - lending seen by banks as less risky if firm’s bigger (more likely to get money back)
??Risk-bearing economies of scale?
Explanation?
Large firms = can diversify into product areas (e.g. make diff things) + diff. markers (e.g. countries)
Demand for any 1 product in any 1 market can vary but diversification = more predictable overall demand (if demand for 1 falls, there’s other products/diff markets whose demand somewhere increases)
External economies of scale? (3)
Local colleges may start to offer courses/qualifications needed by big local employers = reduces firms’ training costs
Large companies in area -> improvements in road networks/local public transport
Lots of firms doing similar/related things locating near each other = share resources e.g research facilites + suppliers could locate in same area = reduces transport costs
Monopoly?
How is a monopoly formed? (2)
Extremely successful companies can gain monopoly power in market
As avg cost for prod. falls, firms can sell at lower £££ - undercutting competition
= Bigger market share - force competitors out of business = only suppllier = it has monopoly
Diseconomies of scale?
Firms can encounter diseconomies of scale as it increases in size = ‘disadvantages of being big’
Internal factors (3)
Wastage & loss can increase - materials seem in plentiful supply so waste more. Bigger warehouses = lost/mislaid
Communication - more difficult as firms grow = staff morale
Managers, less able to control what goes on
External factors (2)
As whole industry becomes bigger, £ of raw materials may increase (as demand increases)
If local supplies, not sufficient - more exp. goods from further may have to be bought = buying more doesn’t necc. decrease costs per unit
How is Price in market determined?
£££ charged & Q sold = determined by level of demand & supply in market
Demand
Q of G/S that consumers are willing & able to buy at given price at partc. time
Demand curve
Shows relationship between price & qd (at any given point along curve = shows q of g/s that would be bought at that £)
Movement along demand curve
Caused by changes in price
Demand curve slope?
Why? (2)
Downwards slope - higher prices => lower q demanded
Consumers aims to pay lowest price possible for g&s
As prices decrease, more consumers willing/able to purchase g/s => lower prices = higher demand
Factors causing shift in demand curve?
Population
Income
Price
Changes in taste & fashion - pop/out of fash.
Price of other goods
How does income affect demand? (4)
Amount g/s consumers can afford can affect diff types of goods’ demand
Normal goods e.g. DVDs => demand more as real income increases = shift to right
Inferior goods e.g. cheap clothing, bus travel => demand less as real income rises (demand more exp, goods)
More equal distribution of income => demand curves for luxury goods to shift to left (less rich) + other d curves to left - more people afford everyday items (less poor)
How does population affect demand
Increase?
Decrease?
Example?
Rise in gen level of pop = more indvls demanding g/s
Decline = qd decreases = d. curve shifts to left
Low br in UK = manuf of babywear/prods = decline in demand
How do changes in taste/fash affect demand?
*?
Intro of new prods/invention = can push some prods into decline
*Gov. can influence taste/fashion of consumers - encouraging/discouraging consp’tion of certain g/s e.g. beef & mad cow disease
How does price of other goods affect demand? (2)
Substitutes=altn’ives e.g. Coke & Pepsi: if Pepsi price doubles, consumers can switch to Coke = movement along Pepsi demand curve & rightward shift in Coke d. curve
Complements = joint demand e.g. strawberries&cream: if £ of strwb went down, there’d be incr. in qd/movement = higher demand for cream
Derived demand?
Example?
The demand for a good/FoP used in making another good/services
Increase in demand for cars = steel demand increases
Composite demand?
Example?
More than 1 use
Oil used for fuels/to make plastics
Changes in demand curve for oil => changes in demand curve for plastic
Elasticity of demand
Measure of how much demand for a good changes with a change in one of key influences on demand - price of good, level of income & price of another good
Price elasticity of demand?
Simple def:
Measure of how q demanded of good responds to change in its price
How consumers react to change in price
PED forumla
1?
2?
%change in QD ÷ %change in ££
%change in QD = (chnge in demand ÷ orgnl demand)×100
%change in ££ = (change in ££ ÷ original ££)×100
Most goods’ PED?
Negative PED - demand falls as prices increases
If PED is >1: (3)
Graph:
ELASTIC demand
% change in ££ causes larger %change in QD
Higher PED = more elastic demand
Normal demand curve - downwards slope
If PED = ∞: (2)
Graph:
Perfectly ELASTIC demand
Any increase in price will cause demand to fall to 000
0 < PED < 1 : (3)
Example:
Graph>
INELASTIC demand
%change in £ will cause smaller %change in QD
Smaller PED = more inelastic
Cigarettes = fairly inelastic
PED of 0:
Perfectly INELASTIC demand
Any change in ££ = no effect on QD
PED = +/- 1 : (2)
Unit elasticity
%change in ££ = %change in QD
Income elasticity of Demand
Simple def:
Measures how much demand for good changes with change in real income
How demand changes with income
YED formula:
%change in QD of good ÷ %change in real income
YED > 1 : (2)
Example
Graph:
Income ELASTIC
More than proportionate change - as incomes rise, demand rises
Normal goods
Upwards slope
YED < 1 : (2)
Graph?
Income INELASTIC
small change
steep upwards slope
YED = 0 : (2)
Graph?
Perfectly INELASTIC
No matter how high incomes rise, demand = remains constant
Vertical line
Cross elasticity of demand
Measure of how QD of 1 good responds to change in PRICE of another good
XED Formula
%change in QD Good A ÷ %change in PRICE of Good B
If 2 goods are substitutes?
Positive XED
If 2 goods are complements:
Negative XED
Determinants of PED:
Availability of subs
Type of g/s
Proportion of income spent on good
Time
Availability of subs?
*?
More subs => more elastic - many subs = consumers can easily switch to something else if ££ prices
No. of subs = depends on how closely its defined e.g.peas = subs like carrots but veg. as group = fewer subs
Type of good/service? (3)
Luxury/necessity - essential iterms e.g. milk = price inelastic but non-essential e.g. tablets = price elastic
Habit-forming/addictiveness = inelastic e.g. cigs
Purchases that can’t be postponed = e.g. emg. plumbing servs = inelastic
Proportion of income spent on good?
Demand for prods tha need large prop of cons’ income e.g. fridge = more elastic than demand for small prop. of income e.g. toothpaste = consumers more likely to shop around for best price of exp. good
Time period following £ change? (2)
Prices become elastic in long run as it becomes easier to change to alternatives (time to shop around) = cons. have longer to respond to £change
Long run = habits/loyalties can change
If good has elastic demand?
Increase in ££ will reduce TR
If good has inelastic demand?
Increase in ££ will increase firm’s TR
YED - Normal good (3)
Graph?
Positive YED
Income rises = demand rises
Size of demand increase depends on prod’s elasticity
Upwards slope - Q against Income
YED - inferior goods (3)
Graph?
Negative YED
Demand falls as income rises
A rise in income leads to inferior good being replaced by one cons’d higher qual
Downwards slope with inc & q
How is XED useful?
Show if 2 goods = Sub? or Compl?
XED & Complements (2)
If 2 goods = complements = -XED
Increase in £ of 1 e.g. strwb = reduction in demand for compl e.g. cream
XED & Substitutes (3)
If 2 goods = subs = +XED
Fall in £ of 1 sub e.g. rice = reduce demand for another e.g. pasta
Closer sub = higher + XED e.g. ballpoints + fountains = higher XED than ballpoints + pencils
0 XED?
Independent goods + don’t directly affect demand of each other e.g. bananas & slippers
Info about YED? (2+expl)
Useful in sales forecasting
If you know YED of product + likely changes in income, then can predict sale levels
Pricing policy
You could reduce price for normal good when incomes are expected to fall (/demand for normal goods, expected to reduce, usually) so could limit expected reduction in demand for good (demand doesn’t decrease massively so smaller cost/loss)
Firms - YEDs? + Expl?
Firm could choose to supply range of goods with various YEDs
During boom, demand for product with high YED will increase, but that means demand for that prod will decrease just as much when in recession. So firm will want to supply prods with low YED so they can still earn revenue during recession
XEDs
Example
Useful for firms - tells them how to react to changes in price of related products so they can maximise demand for their prods
e.g. if firm sells product that has close sub & that sub’s price drops, they could lower price of their prod to reduce potential/possible fall in demand
Govs
Example
Find it useful to know how demand for goods might change during booms & recessions when setting policies
e.g. demand for bus services may increase with falling incomes in recession so gov. would have to make sure sufficient bus services were provided
Supply
Q of g/s that producers supply to the market at given price + partc. time
Supply curve
Increase in ££ causes extension in supply
Movement along supply is caused by change in price
Why does QS increase as ££ increases? (3)
*?
Producers/sellers aim to max. profit
Higher price for g/s = higher profit = incentive to expand production & increase supply
Incr ££ = becomes profitable for marginal/extra firms to supply market [firms just breaking even/point when profits=cost so no real profit]
Increasing supply = incr. costs - firms will only prod. more if £ increases by more than costs
Determinants of supply (6)
Cost of production
Improvements in tech
Prod’vity of FOPs
Indirect taxes & subsidies
Prices of other goods
No. of suppliers
Changes to cost of production
Example
Increase in 1/more costs of prod e.g. raw materials/wages etc. will decrease producers’ profits & cause supply curve to shift to left
e.g. increase in cost of cocoa = reduction in supply of choc. but decrease in cost of packging = increase in supply
Improvs in tech
Example
Can increase supply - reduce costs of prod
e.g. improv in energy efficiency of commercial freezers could reduce energy costs of food company
Changes to prod’vity of FOPs
Example
Increased prod’vity of FOP = company gets more output from unit of factor
e.g. more productive staff = incr. in output + shift to right
Indirect taxes & subsidies (2)
Indirect tax on good = increases costs for producer => supply reduced + s curve to left
Subsidy on good = encourages its production - reduces costs for producers => leads to incr. level of supply & supply curve shifts right
Changes in price of other goods
If price of Prod A made by firm increases then firm could switch production from less profitable Prod B to increase production of A + make the most of higher price they can obtain
= supply increased
No. of suppliers
Increase in no. of suppliers in a market (incl new firms) = will increase supply in market at each/every price
= supply increased/shift to right
Joint supply? Example?
When production of 1 good also results in production of another
Increase in demand for beef increases supply of leather
Price elasticity of supply
*Generally?
Measure of how quantity supplied of good responds to change in its Price
Gen. positive - higher £ = greater supply
Formula
%change in QS ÷ %change in £
PEs > 1 : (3)
Graph:
Elastic supply
%change in price causes larger %change in q supplirf
Higher PES value = more elastic supply for good
Steady upwards slope
PES of +/- ∞ : (2)
Example
Graph
Perfectly INELASTIC supply
Any fall in price causes QS to reduce to 0
When min. prod. cost of something = £100 then that cost has to be paid by cons. so slightest decrease in £ means production not possible
Horizontal line
0 < PES < 1 : (3)
Graph:
INELASTIC supply
%change in price causes smaller %change in QS
Smaller PES = more inelastic
Steep upwards slope
PES of 0 : (2)
Graph
Perfectly INELASTIC supply
Any change in £ = no effect on QS
Vertical line
PES of 1 : (2)
Unit elasticity of supply
If %change in QS = %change in £
50% increase in price = 50% increase in QS
