Markets In Action

Question 1

Factors effecting product demand

Answer 1

Price of product, Price of product complements, Prices of substitutes for products, Levels of consumer income, Changing preferences, Speculative demand

Question 2

Factors affecting product supply

Answer 2

Price of product, Costs of production, Prices in competitive supply, Number of producers, Sale of production, Gov. and tax

Question 3

Main functions of the price mechanism

Answer 3

Allocation, Rationing, Signalling, Incentives

Question 4

Allocation

Answer 4

Allocating scarce resources among competing uses

Question 5

Rationing

Answer 5

Prices serve to ration scarce resources when market demand outstrips supply

Question 6

Signalling

Answer 6

Prices adjust to demonstrate where resources are required, and where they are not

Question 7

Interest rates

Answer 7

The cost of borrowing money

Question 8

Demand

Answer 8

The willingness and ability to purchase goods

Question 9

Price Elasticity of Demand (PeD)

Answer 9

%change in demand ÷ %change in price

Question 10

Income Elasticity of Demand (YeD)

Answer 10

%change in demand ÷ %change in income

Question 11

Elasticity

Answer 11

The responsiveness of demand to changes in price

Question 12

Nominal Income

Answer 12

Your income without taking into account the rate of inflation

Question 13

Real Income

Answer 13

Your income while taking into account the rate of inflation

Question 14

Inferior goods

Answer 14

low-cost replacement goods that are seen as poorer quality

Question 15

Cross-price elasticity of demand

Answer 15

Measures the responsiveness for good (x) following a change in the price of a related good. With this we can make an important distinction between substitute and complementary goods

Question 16

Perfect competition

Answer 16

1. Homogeneous products
2. Price takers
3. Perfect knowledge
4. Many firms
5. No barriers
6. AR=MR=D

Question 17

Imperfect competition (Monopoly)

Answer 17

1. Differentiated products
2. Price makers
3. Barriers to enter and exit
4. One firm
5. Imperfect knowledge
6. AR=D, MR different

Question 18

Market Conduct

Answer 18

How markets compete and whether firms work in isolation or have competition

Question 19

Market performance

Answer 19

Whether the market satisfices or profit maximises along with market efficiency

Question 20

Reasons for increase comp in perfect markets

Answer 20

Increased disposable income of customers
Reduced rent in certain areas
Sellers offering slightly different services
Increase in the number of professionals with qualifications

Question 21

Monopolistic competition

Answer 21

A form of imperfect competition. It’s like the perfect competition but more realistic. Many buyers and sellers, slightly differentiated goods, firms are price makers, low barriers to entry and exit, good info, non-price competition, profit maximisers

Question 22

Allocative efficiency

Answer 22

all goods and services meet the needs and wants of society, when price equals MC

Question 23

Productive efficiency

Answer 23

When goods are produced at minimal cost, when price equals AC is at its lowest

Question 24

Dynamic efficiency

Answer 24

Ability to adapt and improve its productivity over time in response to changing markets, technologies, and customer preferences. Need profits for reinvestments long-term

Question 25

Social efficiency

Answer 25

The optimal distribution of resources in society taking into consideration all the internal and external costs and benefits

Question 26

Oligopoly competition

Answer 26

1. Few firms dominate the market
2. Differentiated goods
3. High barriers to entry/exit
4. Interdependence
5. Non-price competition
6. Fight for market share over profit maximising

Question 27

Contestable markets

Answer 27

Always changing and driven by the fear of competitors. Almost all markets are contestable to some degree. An entrant has access to all production techniques

Question 28

Hit and run entry

Answer 28

When businesses enter an industry to take advantage of temporarily high (supernormal) market profits then leave after taking those profits

Question 29

Sunk costs

Answer 29

Costs that cannot be recovered if a business decides to leave an industry. The existence of sunk costs makes a market less contestable

Question 30

Creative destruction

Answer 30

When newer innovations destroy older economic structures while simultaneously creating new ones. For example the invention of the automobile caused the fall of the horse and carriage market

Question 31

Price fixing in a cartel

Answer 31

A cartel is a group of firms colluding to maintain high prices. In a competitive market demand is equal to supply but in a cartel they will charge the profit maximising price and will not set prices lower, they restrict output and increase price. Cheating in a cartel can destroy the cartel so they sanction the cheater and rebuild. Main aims are profit maximising and price fixing which is achieved by quarters based on each firms contributions

Question 32

Negatives of a cartel

Answer 32

Cartels allow inefficient firms to stay in business rather than cutting costs or going out of business, while other more efficient members of the cartel enjoy abnormal profits. Cartels portray the disadvantages of monopoly by protecting inefficient firms and enabling firms to enjoy an easy life protected from competition

Question 33

Divorce of ownership from control

Answer 33

A situation where although a firm is owned by its SHAREHOLDERS it is actually controlled by the firm’s management

Question 34

Long run monopolistic competition

Answer 34

No allocative efficiency as MC is lower than price, consumers being exploited. No productive efficiency as not producing at lowest point of AC. No dynamic efficiency as no long run sp so not enough profit to reinvest