Markets In Action Flashcards
What is economics about?
The efficient allocation of scarce resources
What is opportunity cost
The next best alternative forgone
Give an example of an opportunity cost scenario
If I had 1 pound and wanted to buy a pizza that cost 1 pound and I had to pick between margarita and pepperoni if I picked pepperoni the margarita would be the opportunity cost.
What is the PPF/PPC
The production possibility frontier/curve is it graphical representation, of the maximum number of goods or services , an economy can produce using all of its resources to there full potential
Give three examples of Land resources
Natural resources like:
Land
Sea
Minerals
What is the labour resource?
Human resources this depends on the populations size and peoples skills and levels of training
What is Capital and Give two examples of Capital resources
Man made aids: factories, equipment
What is Pareto optimality
Pareto optimality or Pareto efficiency is when it is impossible to improve one thing without making the other worse
What are the four factors of production?
Think C.E.L.L
Capital Entrepreneurship Labour Land
What does an increase in the price of a good do to the demand curve?
It causes a contraction of demand
What does a decrease in the price of a product do to the demand curve
It’s causes an extension of demand
Does price move the demand curve?
Price does not move the demand curve it only causes an extension of demand or a contraction of demand
What is a contraction of demand
When the price increases the amount of people willing and able to buy the products decreases
What is an extension of demand?
When the price of a good or service is lowered more consumers are willing and able to purchase it
Name the 7 factors that cause a shift in the demand curve
Weather Income Fashion Complementary goods Advertising Population Substitute
What is Consumer Surplus?
The extra amount that a consumer is willing to pay for a product above the Market price of the product
Give an example of a shopping scenario where there is a consumer surplus
If I go to new look and expect to buy a blouse for £20 but there is a 25% sale and the blouse actually costs £15 there is a consumer surplus of 5 pounds
What is a market
Any place where the transactions of buying and selling occurs.
What is demand
The amount of a product that customers are willing and able to buy
Why does the demand curve say an inverse relationship?
As the price increases the demand falls and vice versa
What does Ceteris Paribus mean?
All other things being equal
What is the label on the Y axis?
Price
What is the label on the X axis?
Quantity
What is above the price that the consumer has to pay but below for the price they thought they were to pay?
Consumer surplus
What is supply?
The amount of a product that producers are willing and able to produce at different market prices over a period of time
What does the supply curve show ?
The supply curve shows the relationship between the quantity of a product supplied and the price of the product
What causes a contraction of supply?
A reduced price (that the producers will get for a product)
What causes an extension in supply?
An increase in price (that producers will get for a product)
Does a change in price cause the supply or demand curve to move?
No a change in price only causes an extension or contraction in demand. A shift in supply or demand are caused by factors other than price
What factors cause a shift in supply?
Productivity Indirect Taxes Number of firms in the market Technology Subsidies (grants) Weather Costs of production
What is producer surplus ?
When the market price is higher then what the producer was originally willing to accept and supply at.
If I’m willing to sell shoes for £30 but the market price is £40 I have producer surplus of £10
What is Price Equilibrium ?
The market price at which quantity demanded of a product is equal to the quantity that is supplied by producers
What happens to supply when demand is shifted to the left? Why does this happen
There is a contraction of supply when demand is shifted to the left as less product is needed if less people are willing and able to buy it
What happens to supply when demand is shifted to theright
The Producer makes more of the good so there is an extension in supply to satisfy the need and bring the producer more sales 👉 more money
What is it called When the quantity demanded of a good is smaller than the quantity supplied?
There is a surplus of supply (excess)
What is it called when the quantity demanded is larger then the quantity supplied
There is a shortage in supply
How may a firm try to manage excess supply
They may reduce the price of a good so more people are able to afford it. This is an extension of demand
How may affirm try to manage an access of demand
Increasing the price will lead to a contraction of demand as less people will be able to afford the product
What does PED stand for
Price Elasticity of Demand
What does it mean if a product is has price inelasticity and give an example
That the change in price to the product will not be to a significant change in demand e.g. petrol. If it has a PED of 0 to -1 it is inelastic
What is price elasticity of demand
This measures the responsiveness of demand to a change in price
What is the equation for PED
Percentage Change in quantity demanded
______________________________
Percentage change in price
If a product has a PED that is smaller than -1 is it elastic or inelastic
Elastic
If a product has a PED of -1 is it elastic or inelastic
It is unitary
What happens to the total revenue of a business if the majority of it comes from a product that is price elastic eg a pink blouse and the price is increased
The TR will reduce as people will pick an alternative
What is income elasticity of demand ?
The responsiveness of demand to changes in people’s incomes
What does YED stand for?
Income elasticity of demand
What is a normal good? + example
A good where the demand rises as peoples income rises and the demands of the product falls as income falls
Eg iWatch
What is an inferior good? + example
A good where demand increases as income decreases OR
Demand falls as income increases for example the basics range of goods at Sainsbury’s
How can you tell whether a good is normal or inferior
If it is positive ( after being put in the equation) it is a normal good
If it has q negative sign it’s an inferior good
What is the equation for YED
The equation for income in elasticity of demand is
Percentage Change in quantity demanded
______________________
Percentage Change in income
What does XED stand for ?
Cross elasticity of demand
What is Cross elasticity of demand?
The responsiveness of demand of a good to changes in the price of a related good (substitute /complement )
What is the equation for Cross Elasticity of demand?
Percentage change in quantity demanded of your good
_________________________
Percentage change in price of substitute / complement
What does it mean if XED is positive?
The good in the equation is a substitute for the main good and they are in direct proportion eg of pepperoni pizza prices are increased ppl may just buy Hawaiian instead
What is scarcity?
This occurs as consumers have infinite wants but there are finite resources
What do economists mean by ‘the Economic Problem’ ?
The idea that there is scarcity as there is infinite wants but finite resources meaning economies must make a choice about what goods and services should be produced
How they should be produced
and
how the factors of production (capital, entrepreneurship , land and labour) must be allocated
What is the role of markets in allocating scarce resources?
It depends on the type of market:
Free Market
Mixed Matket
Command economy
How are resources allocated in a mixed economy ?
This is s blend of the free market and command economy
Resources are owned by individuals (like in freemarket) and the state meaning the government can make adjustments to markets with taxation
How are resources allocated in a command economy ?
All resources are allocated by the government
How are resources allocated in a free market ?
The price mechanism scheme is used which means the higher the demand of a product the higher the price that consumers must pay. A high market price encourages more producers to move more resources into the production of this good as they know by producing more if the product their profits will rise.
Also will the lower the demand of a product the cheaper the product is
What is a competitive market?
When there is oligopoly, meaning there are several providers of a good or service in a market meaning the firms must compete with each other to offer the best prices and quality of good/service
as the consumer has several options on where to get the good/service and can choose a more capable firm if the meaning consumer welfare (allocative efficiency )is high
What happens to consumer surplus as demand increases?
Consumer surplus will decease as an increase in demand means firms will charge a higher price
When is there a price equilibrium ?
When producers and consumers are happy with the market price and quantity supplied therefore supply and demand is equal
What is a free good?
A Free good is not scarce and has no opportunity cost so it is available in great quantity
What is an economic good?
A good/ service that has benefit to society and has a degree of scarcity so people are willing to pay for them
What is a positive statement
A positive statement is an objective statement that can be proven by referring to evidence
E.g. if the government raise taxes on Beer this will lead to a decrease in amount of people buying beer
What is a normative statement?
A statement that is subjective so it is based on personal opinion and can’t be proven with evidence
Eg unemployment is worse than inflation
What are the two types of market failure?
Where the price mechanism fails to sufficiently allocate scarce resources or when the operation of markets leads to a social welfare loss
What is the other word for a normative statement?
Value judgement
What is a complete market failure?
When the market does not supply products at all ‘missing markets’
What is partial market failure?
When the market does function but produces either the wrong amount of a product or produces products at the wrong price
What is allocative efficiency ?
When consumer satisfaction is maximised
What are the causes of Market failure ?(6)
L abour market failure
A symmetric knowledge
M issing markets
Ę xternalities (positive or negative)
M onopoly
U nstable prices
Explain how the labour market failure leads to market failure
Jobs are not being allocated efficiently as the employer may discriminate against people of a certain age race gender or religion meaning they will not get the job even if they are the most qualified
People may live very far away from where the jobs are and because of social ties or money issues they cannot move to where the jobs are, this can lead to less qualified people getting the job
Explain how addy metric knowledge leads to market failure
If one of the people in the market( the buyer or seller )has a lot more information on the good being sold then the other they may exploit this knowledge
for example bad builders may tell a consumer that they need more work done on the roof then necessary so they will gain a larger profit, because the consumerknows nothing about roofs they are not in a position to disagree meaning they will be over priced and the quantity supplied will be too high
Explain how missing markets leads to market failure
Some goods /services would not be produced if they were allocated under the price mechanism as they are public goods (there is no rivalry meaning one person consuming the product doesnt reduce others ability to consume it)eg street lamps ,
if allocated under the price mechanism people would just wait for someone to pay for the street lamps , and because they are non-excludable other people could also use the streetlamps without paying for them .
Or no one would pay for it at all so a missing market remains
What are externalities
externalities are costs or benefits that effect people other than the buyers and sellers and are not considered by the buyers and sellers. This leads to the wrong output of this product
Explain how externalities leads to market failure
Negative externalities cause the social cost of production to be larger than the private cost
Eg Lung cancer caused by passive smoking
Positive externalities cause the social benefits to be larger than the private benefits
What are private costs/ benefits?
Costs/ benefits to the buyer or seller
What are social costs/ benefits?
Costs/ benefits to people who are not involved in the transaction as well as the buyers and sellers
How can monopoly lead to market failure
Because only one firm provide the goods or service they have a larger amount of control over price and quantity than normal meaning they can exploit this power and charge unfairly high prices leading to low consumer welfare
How can unstable prices lead to market failure?
Commodities (raw materials) are supplied to countries according to the price mechanism meaning they face much more fluctuations than manufactured goods.
This is bad for suppliers as they can’t predict the revenue they’ll receive. Since they have quite inelastic supply they may not be able to react to a sudden increase in demand. Eventually it could lead to them leaving the market.
What is an oligopoly
When there are several suppliers of a good/ service which creates a competitive market which increases consumer welfare eg the Big 4 supermarkets
What is a Merit Good
Goods/ services that the government feels people will under consume so they subsidise them or make them free of charge so the consumption of these goods/services does not depend on people’s ability to afford them eg our public education system
What is a de merit good
Goods where the consumption is seen as socially undesirable and they create negative externalities
would be over consumed in a free market economy
Eg If there weren’t large taxes on tobacco their consumption would be higher and so would the impact of negative externalities
What is a public good
Goods that would not be provided for in a free market economy and are provided for by the state. They have non rivalry and non excludability
What is non rivalry
The idea that one person consumption of a good or service won’t reduce other people’s ability to consume the good eg beaches, street lamps
What does it meen if a product is non rejectable?
You cannot reject the good/service as the supply is collective eg Flood Defence project
What are the three characteristics of public goods
Non excludability
Non Rivalry
Non rejectable
What is the free rider problem ?
That some people are able to enjoy benefits of public goods without paying for them as they have non excludability eg avoiding taxes for bin collections doesn’t stop you from getting your bins collected no one is incentivised to pay for it
What is a quasi- public good?
Goods that have some characteristics of a public good but not completely , it may have semi non rivalry or semi non excludability eg beaches can become overcrowded restricting access for some people
What is non excludability ?
The benefits of consumption of a good isn’t only restricted to those that pay for the good
What measurements does the government take to correct market failure?
Indirect Taxes-Shift supply curve to the left so firms can’t produce as much demerit goods and consumption decreases as less people are willing and able to afford it (as price rises quantity demanded falls)
Subsidies-Given to merit goods to increase the consumption of these goods that would otherwise be under consumed eg if the NHS didn’t get subsidies from the government this resource would have to be allocated by the price mechanism scheme and not everyone would be able to afford it
Regulation - (Legislation) to deal with asymmetric knowledge and other causes of market failure , the government place a limit or ban on production on / demand of a demerit good eg the sale of guns is illegal people under 18 can’t buy tobacco or people under 17 can’t drive
Property Rights- when organizations own areas if someone abused this area they will be shed by the Organization that owns it, which reduces the likelihood of it being abused
Redistribution of income - Income tax based on amount of salary earned
Information provision
What are some determinants of price elasticity of demand?
Time period it takes to manufacture/ produce the good or service
Number of substitutes (the more substitutes there are the more elastic the supply is)
Luxury vs necessity if it’s seen as a necessity it will be price inelastic
Explain why the amount of time that it takes for a good to be sold is a determinant of elasticity
Time period- The longer people have to wait for a good to be sold the more price inelastic it will be because if people are waiting for a long time they are in suspense and a sudden increase in price will hardly change the demand eg if that iPhone 7 isn’t coming out until next year as people think it will cost £300 people are eager to get their hands on it if the price actually increases to The £150 people will still be very eager to get it
Explain why the amount of substitutes in the market a good has is a determinant of elasticity
If the product has many substitutes consumers will be less willing to pay a higher price for this good for example if Saint Joseph’s oranges normally cost 1 pound but increase to £1.50 but Sainsburys basic oranges still costs 1 pound people will buy the Sainsburys oranges
Explain why whether the good is seen as a luxury or necessity is a determinant of elasticity
If people view a product as a luxury (something that isn’t needed ) the product will have higher price elasticity.Due to the fact that if it is too expensive people would not buy any more however if the product is seen as a necessity an increase in price will hardly affect the demand of the product for example addictive demerit good such as tobacco and drugs have high taxes on them put in place by the government as they know this will not reduce the amount of people that buy these products as they are addicted
Why is elasticity important for firms?
It helps businesses to determine the relationship between changes in price and total revenue
It helps analyse the effects of timelag is in production
Influences the behaviour of the business
Why is elasticity important for the government?
It helps them know which goods they should tax
What type of products to the government normally put taxes on?
De-merit price inelastic goods as they are seen as a necessity and the high burden from the tax is out on the consumer
What type of products to the government normally put subsidies on?
Merit goods that would be under consumed in a free market
What is a direct tax?
An unavoidable tax eg one that taxes people’s incomes
What is an inderct tax?
Taxes that are put on goods and services e.g. VAT
What is a subsidy?
A payment given by the government to a producer of a good or service in order to reduce the cost of production which leads to a shift in the supply curve
What is a working monopoly?
A form that has over 25% of the total sales in the market
What is a legal monopoly?
A monopoly that is protected by law from competition
How can monopoly power grow?
Monopoly power can come from successful internal growth of the business (a business grows by hiring more staff and getting more equipment which leads to an increase in output)
or
through external growth such as merges and acquisitions
Vertical integration
When a firm joins with what takes over that is in a different stage of production
What is backward vertical integration ?
When a business joins with the firm that is in the previous stage of the supply chain for example if iPhone joined with their steel suppliers
How do you some companies protect their monopoly power
Barriers to entry are designed to block rival businesses from entering a market
What are the advantages to the firm that applies barriers to entry
It makes the market less competitive and reinforces the businesses market power
It helps to maintain high profits for the business
increased producer surplus as the firms can charge more
How do you barriers to entry disadvantage the consumer
Monopolies make higher profits for the firm at the expense of the loss of allocative efficiency
higher prices means a reduction of consumer surplus and welfare
consumers wants and needs are not satisfied as the product is being under consumed
What are some things that make the idea of monopoly power less negative
Research and development
Economies of scale: monopoly producers may achieve a reduction in price on supplies as they buy them in bulk so they have lower production costs
International competition
Price regulation from the government
How can monopolies help with research and development
Profits that the business make can be used to fund innovation that has important positive externalities this can lead to gains in dynamic efficiency
What is government failure?
When intervention from the government needs to a deeper market so year or a new market so your meaning of the intervention creates further misallocation of resources or a loss of economic and social welfare
Give examples of where intervention from the government can intervene and lead to market failure
When government policies can lead to long term damages on the economy or society eg if the high taxes on tobacco led to hardly any consumption of cigarettes
Policies may be ineffective in meeting aims if the pricing on plastic bags lead to people to steal these bags meaning the government dont benefit from the 5p pricing and the environment is disadvantaged as well
When a policy doesn’t cause a change in peoples behaviour
State causes of policies that lead to government failure
Government self interest
policy shortsightedness ( looking for a quick fix )
regulatory capture
Information failure
Disincentive effects (gov aren’t incentivising people to take action that helps the economy )
Unintended consequences - When policies have an unexpected or unintended side-effect
People and businesses find ways to get around new laws eg tax avoidance
What is regulatory capture?
When the people in charge of business regulation have more loyalties and sympathy for the companies and therefore are less tolerant to the needs of consumers
When calculating income elasticity of demand if the answer has a positive sign what does this mean?
It’s a normal good and as peoples income rises demand for this product also increases
When calculating income elasticity of demand if the answer has a negative sign what does this mean?
It is an inferior good and as income rises demand falls
What does it mean if XED is negative
The two goods are compliments so an increase in price of one of these goods leads to a decrease in demand both of these goods
What does it mean if XED is positive
This means the good is a substitute for the other so an increase in price in one good will lead to an increase in demand for the other
What is the law of unintended consequences
The idea that actions from consumers producers and the government always have effects that are not expected or intended
State some reasons for why government intervention by policies can cause government failure
Value Judgment -some people in government may want to enforce a particular policy for their own interest
PED
Price elasticity of demand has an large impact on the effectiveness of policy a high tax on the price in elastic good means the policy will hardly reduce consumption of the good
Combinations of policies:
One intervention unknown is unlikely to solve deep rooted problems are combination of policies may be needed for example policies that work on markets demand and supply
Power markets
market forces can be powerful and finding profitable sedations to problems
Law of Unintended Consequences:
Intervention does not always work in the way that economic theory predicts it should
What is a behavioural nudge when concerning government intervention?
An alternative to using taxes or subsidies it is when the government tried to put in the policy that will influence choices
Give an example of behavioural nudges
Banning smoking in public areas
banning takeaway close to schools
laws on the use of tanning salons
What is a financial disincentive
Is a form of government intervention by the government put in a policy that makes the use of a good or service to expensive for some people they can no longer consume it
Give two examples of financial disincentive as a form of government
Hi taxes on cigarettes
the congestion charge
vouchers for healthy food choices
How do you the government try to fix market failure in terms of influencing choices
Providing information -making calorie counts essential on menus
changes to business design by creating buildings with fewer lifts
changes to default making salads the default option instead of chips
Where is demand for labour(workers) derived from
Demand for labour is derived from demand of the goods or service, demand for workers in an iPhone factory is derived from the amount of demand for iPhones
Are doctors jobs supply inelastic or elastic why?
They are supply inelastic as it takes a long time for employers to find new doctors if there is a change in demand for healthcare this is because it is difficult to find doctors as they must be highly qualified and it takes years for them to become qualified
When was the national minimum wage introduced and who was it brought in by
1999 but the low pay commission
What is the price floor
A determined amount that employers can’t pay below(£3.87 for 16&17 year olds)
Why does national minimum wage need to be set above the normal free-market made to have a direct effect
If normal free market pay 4 pounds an hour but the national minimum wage is below this the NMW is not going to make a difference to people who are underpaid
What are the benefits of the national minimum wage
An improved incentive for people to find work which expands labour supply which will boost economic growth and lead to an outward shift in the production possibility frontier
Reduction of relative poverty
reduced exploitation of low-paid workers
reverse the effects of employment discrimination
What are the costs of the national minimum wage
Medium paid and higher paid workers may demand a raised as they want to keep the differential in wages between the low paid and high paid
Damages the competitiveness of UK firms in comparison to firms in other countries where there is no minimum wage so they have more money to spend on technology and improving their products
Firms may employ less workers as they do not want to spend too much money on labour costs so there is increased unemployment
What is a buffer stock?
A scheme that is supposed to stabilise the price of a commodity by buying excess supply in periods when supplies high and selling when supply is low
Why do suppliers in commodity markets require stable prices?
Commodity suppliers have inelastic supply this is particularly evident in good is that our harvest in the market that if this is the supply curve will shift to the right and harvest is good but shift to the left when the weather is poor so the crops are less.Because of the varying supply prices vary also as if shifts to the right in supply can cause prices to D crease as firms wanting sure that’s the good is sold before it parishes. Meaning there is a large level of uncertainty.
How does a buffer stock scheme stabilise prices
(Using the crop example)
There is a set intervention price the buffer stock will act if the price moves from the intervention price.
When the harvest is good and there is excess supply this excess supply is brought up by the buffer stock to prevent prices from falling too low.
When the harvest is poor stocks of the commodity are released on the market to maintain the price
What are the disadvantages of a BS scheme?
If the intervention price is too high the BS will become unsustainable ad the firm May spend all their time trying to boost the price up to the high intervention price and the firm hard to get the cells of it and that running out of money
Some markets are too big to be in for the mess by the schemes
Storage costs are high and the good may go off if perishable or they may need special conditions which are expensive
What are the advantages of a BS scheme?
They get rid of uncertain income and profit
In 2013 The carne in government established a buffer stock agency to ensure food security and stabilise food prices for supply
State 2 alternatives to buffer stock schemes
Mobile technology to improve productivity
encouraging branding as this raises prices and stability for farmers
improved basic storage and irrigation facilities(watering the soil)
What is the difference between fixed costs and variable costs
Fixed costs must be paid by the firm even if the output being produced of the goods or service is zero variable costs very directly with the level of output of a good or service
Give three examples of fixed costs
Rent/mortgage
loan repayments insurance
Give three examples of variable costs
Wages (as labour demand depends on demand of a good)
Raw materials
Fuel costs
What Is the equation for the total cost
Total cost :
FIXED COST+VARIABLE COST
What is the equation for the average total cost?
TOTAL COST
_____________
QUANTITY
PRODUCED
What is the Marginal cost
The additional cost that a firm must pay if it increases output by one unit
What is the TC
Total cost is the sum of all costs face by producing at a given level of output
What is an internal economy of scale?
When a firm grows in size by increasing output so they benefit from lower average costs
What is an external economy of scale?
The whole industry grows in size so the firm benefits from lower costs
What are diseconomy is of scale
When the firm grows to the gods and average costs started to rise for example labour costs and capital from buildings & storage
Name the six economies of scale
Risk bearing Advertising Purchasing Technical Financial Managerial
Explain the Risk bearing economy of scale
The business is more like the to be able to survive economic damage as it is very large
Explain the advertising economy of scale
Large companies can use expensive TV and radio advertising which brings more units then some more shops that give out leaflets
Explain the purchasing economy of scale
They can buy in bulk so they get cheaper prices
Explain the technical economy of scale
Bigger companies have access to better technology giving them a competitive edge
Explain the financial economy of scale
They are more likely to get a lower interest rate if they are a big business as there is hardly any risk in lending to them they can also get loans of a large amount compared to a small businesses
Explain the managerial economy of scale
The biggest and best firms will attract top graduates so their business is more productive as they have specialised workers
Equation for profit
TOTAL REVENUE - TOTAL COSTS
Why are economies of scale important for businesses ?
The purchasing economies of scale which leads to low average costs and the financial economy of scale which leads to a lower interest on loans means that costs are minimised which means profit increases
The managerial economies of scale which means The farmer get access to better employs means less money is spent on training them
What is technical efficiency ?
Attaining the largest amount of output from a given set of input
What are alternatives to buffer stock schemes?
- Mobile technology to help improve productivity
- Encouraging branding as this raises prices and offers more stability for farmers
- Improvement in storage facilities so commodities last longer
- Micro insurance policies for poorer families
What are positive externalities?
When the production or consumption of a good leads to benefits to a 3rd party outside of the market.
Why might merit goods be underconsumed in a free market?
Since marginal social benefits are greater than marginal private benefits people may believe the goods aren’t valuable to them as they fail to see how it benefits the whole society also. Therefore they don’t purchase them and society misses out.
What are production externalities
An externality that affects the production side of the market it can be either positive or negative
What are consumption externalities
An externality that affects the consumption side of the market it can be either positive or negative
Why can externalities lead to market failure?
Since the cost or benefit is not reflected in market prices it won’t be taken into consideration by all people directly involved in the transaction. So decisions made that are to do with the good will not best interest society.
Give an example of a negative production externality and explain why it is one
Toxic fumes- Cause costs to residents as they may have to spend more money on medical and washing bills.. The residents face costs as a result of the production activities of the firms production activities. The firm will make decisions based on its private costs and these tend to be lower than social costs (to society)
Why do governments intervene with de merit goods
If they don’t set regulations the firms will choose how much to supply on a basis of the MPC to the firm
