Markets Flashcards
Demand
The quantity of a good/service that consumers are willing and able to purchase at various price levels at a given point in time
The Law of Demand
As the price of a good/service increases, the quantity demanded decreases
Changes in price cause…
Movement along the demand curve
Ceteris Paribus
All other things being equal
Factors Affecting Demand
The price of the good or service itself
The price of substitute & complementary goods
Expected future prices
Changes in consumer tastes & preferences
The level of consumer income
The size of the population and its age distribution
Supply
The quantity of a good/service that businesses are willing and able to offer at various price levels at a given point in time
The Law of Supply
as the price of a good/service increases, the quantity supplied increases
Changes in price cause…
Movements along the supply curve
Factors Affecting Supply
The price of the good or service itself
The price of substitute or complementary goods
The state of technology
Changes in the cost of factors of production
The quantity of the good available
Climatic & Seasonal Influence
A Market
Any situation where buyers and sellers are brought into contact to exchange goods & services for payment
Equilibirum
A situation where there is no tendency to change (ie. where demand = supply)
A Situation of Excess Supply
Sellers will lower the price of goods, resulting in an expansion of demand and a contraction of supply until equilibrium is reached
A Situation of Excess Demand
Consumers will bid up the price of goods, resulting in an expansion of supply and contraction of demand until equilibrium is reached
Market Failure
The market fails to consider the costs/benefits that the production has on society, and thus fails to set the ‘best’ price and quantity
Externalities
The social costs/benefits that arise from the production of a good/service
Private Goods
Excludable and have rivalry
Public Goods
Non-Excludable & Non-Rival
Merit Goods
Goods provided by the government, such as public transport
Price Ceiling
The government sets a maximum price
Price is kept below the equilibrium price
Price ceilings benefit consumers
Price Floor
A minimum price set by the government
Price is kept above the equilibrium price
It benefits the producers of the good/serve
Price Elasticity of Demand
Refers to the responsiveness of the quantity demanded to changes in price
Elastic Demand
a strong response to a change in price (if price increases by a small amount quantity demanded decreases by a large amount)
Unit Elastic Demand
a proportional response to a price change
Inelastic Demand
a weak response to a price change (a large increase in price leads to a small increase in quantity demanded)
Factors Affecting Elasticity of Demand
Luxury or Necessity
Existence of Close Substitutes
Proportion of Income Spent on Item
Length of Time since the Price Change
Habit Forming Nature of the Good
Price Elasticity of Supply
Measures the responsiveness of the quantity supplied to changes in price
Elastic Supply
A small change in price leads to a large change in supply
Inelastic Supply
A large change in price leads to a small change in supply
Factors Affecting Elasticity of Supply
Time Lags After a Price Change
The Ability to Hold and Store Stock
Excess Capacity
Mobility of Resources
Market Power
A business’s ability to raise prices above the equilibrium price
Market Concentration
when there is a limited number of firms that exist in the market
Price Takers
firms that have very little market power and must accept the market price
Price Makers
firms that have strong market power and are able to set the market price above the equilibrium price
Pure Competition
Many firms that are small in size
Homogeneous Products
Price Takers
No major barriers to entry
Monopolistic Comepetition
Many relatively small firms
Similar products, but attempts to make their products differentiated (advertising)
Some control over their price
Relatively easy entry, with some barriers (regulations, brand loyalty)
Oligopoly
A few relatively large firms with significant market share
Usually differentiated products which are heavily advertised
Actions in relation to price & product depend heavily on the actions of competitors (price wars)
High barriers to entry (established brand loyalty, high capital investment required)
Monopoly
One firm only, generally large
No close substitutes
Price maker/setter
Advertising is aimed to maintain product image and increase sales
Extremely high barriers to entry
