Markets In Action Flashcards
Factors effecting product demand
Price of product, Price of product complements, Prices of substitutes for products, Levels of consumer income, Changing preferences, Speculative demand
Factors affecting product supply
Price of product, Costs of production, Prices in competitive supply, Number of producers, Sale of production, Gov. and tax
Main functions of the price mechanism
Allocation, Rationing, Signalling, Incentives
Allocation
Allocating scarce resources among competing uses
Rationing
Prices serve to ration scarce resources when market demand outstrips supply
Signalling
Prices adjust to demonstrate where resources are required, and where they are not
Interest rates
The cost of borrowing money
Demand
The willingness and ability to purchase goods
Price Elasticity of Demand (PeD)
%change in demand ÷ %change in price
Income Elasticity of Demand (YeD)
%change in demand ÷ %change in income
Elasticity
The responsiveness of demand to changes in price
Nominal Income
Your income without taking into account the rate of inflation
Real Income
Your income while taking into account the rate of inflation
Inferior goods
low-cost replacement goods that are seen as poorer quality
Cross-price elasticity of demand
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
Perfect competition
- Homogeneous products
- Price takers
- Perfect knowledge
- Many firms
- No barriers
- AR=MR=D
Imperfect competition (Monopoly)
- Differentiated products
- Price makers
- Barriers to enter and exit
- One firm
- Imperfect knowledge
- AR=D, MR different
Market Conduct
How markets compete and whether firms work in isolation or have competition
Market performance
Whether the market satisfices or profit maximises along with market efficiency
Reasons for increase comp in perfect markets
Increased disposable income of customers
Reduced rent in certain areas
Sellers offering slightly different services
Increase in the number of professionals with qualifications
Monopolistic competition
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
Allocative efficiency
all goods and services meet the needs and wants of society, when price equals MC
Productive efficiency
When goods are produced at minimal cost, when price equals AC is at its lowest
Dynamic efficiency
Ability to adapt and improve its productivity over time in response to changing markets, technologies, and customer preferences. Need profits for reinvestments long-term
Social efficiency
The optimal distribution of resources in society taking into consideration all the internal and external costs and benefits
Oligopoly competition
- Few firms dominate the market
- Differentiated goods
- High barriers to entry/exit
- Interdependence
- Non-price competition
- Fight for market share over profit maximising
Contestable markets
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
Hit and run entry
When businesses enter an industry to take advantage of temporarily high (supernormal) market profits then leave after taking those profits
Sunk costs
Costs that cannot be recovered if a business decides to leave an industry. The existence of sunk costs makes a market less contestable
Creative destruction
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
Price fixing in a cartel
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
Negatives of a cartel
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
Divorce of ownership from control
A situation where although a firm is owned by its SHAREHOLDERS it is actually controlled by the firm’s management
Long run monopolistic competition
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