Mod 3 Flashcards
3.1 What is the product market?
Is the market for the outputs of production (goods and services)
3.1 What is the Factor Market
Is a market for any input into the production process (Factors of Production – Land, Labour, Capital, Enterprise)
3.1 What is the role of consumers in product markets?
Consumers, within the constraint of their income, choose what to buy from product markets based on the relative price of each good or service.
3.1 What is the role of producers in product markets?
Producers choose what to produce for product markets based on the relative price of each good or service (however, in the short term, production is “sticky”).
3.1 How do consumers decide how to produce for product markets?
Producers choose HOW to produce for product markets based on the relative price of each factor of production.
3.2 What is demand?
Individual demand is the quantity (amount) of a good or service that a consumer is willing and able to purchase at a given price.
3.2 What is market demand?
Market demand is the sum of all individual demand - the demand by all consumers for a particular good or service.
3.2 What is the Law of Demand?
As price of goods/services increases, the demand for that particular good/service decreases.
3.2 What is Ceteris Paribus and its importance?
To see how demand changes when we change the factors affecting demand. It is too difficult to have all of the factors changing at once - so, we isolate the effect of just one factor by assuming that only one factor changes at any one time, or “ceteris paribus”
3.2 What are factors affecting demand
Price
Income
Population
Tastes
Expected future prices
Price of other goods/services
3.2 How does price affect demand and the demand curve?
*If Ceteris Paribus holds true
Price increases leads to a contraction in market demand.
Price decrease leads to an expansion of market demand.
Therefore causing a shift at a point on the demand curve.
3.2 How does income affect demand and the demand curve?
*If Ceteris Paribus holds true
Consumer income increases = increased market demand for any given price – shift demand curve to the right.
Consumer income decreases = decreased market demand for any given price – shift demand curve to the left.
3.2 How does population affect demand and the demand curve?
Increased population = increased market demand – shift curve to the right.
Decreased population = decreased market demand – shift curve to the left.
Changes in age distribution will increase/decrease the demand for certain goods and services.
3.2 How do Tastes, Expected future price, and price of other goods and services affect demand curve?
Shift demand curve either left or right.
Taste - Population prefers apples, demand for bananas falls
Expected Future Price - Expected future price high, buy now, expected future price low, buy later
Price of Other Goods and Services- If the price of an apple is high and a price for a pear is low, consumers may opt for the pear. Decreasing demand for apples, and increasing demand for pears.
3.3 What is supply?
Individual supply is the quantity of a good or service that a producer is willing and able to sell at a given price
3.3 What is market supply?
Market supply is the sum of all individual supply for a particular good or service.
3.3 What is the law of supply?
The higher the price, the larger the quantity produced, the lower the price, the lower the quantity produced.
3.3 How does price affect supply and the supply curve?
Price increases leads to an expansion in market supply.
Price decrease leads to an contraction of market supply.
Causes a movement along the supply curve – movement of the dot, contraction/expansion
3.3 How does State of technology affect supply curve?
New technologies have the ability to increase the productivity of FOP therefore allowing more quantity of goods/services using the same resources therefore expanding the Supply curve.
3.3 How does Cost Of FOP affect supply curve?
Factors of production that are high-costing contract the supply curve, factors of production that are low costing expand the supply curve.
3.3 How do quantity available affect supply curve?
Quantity available (supply) affects the availability of supply of goods and services, –> low quantity available = low supply - vise versa.
3.3 How do future expected prices affect supply curve?
If suppliers expect prices to go up in the future, they decrease their supply today and save inventory to sell for a higher price in the future.
3.3 How do climatic and seasonal influences affect supply curve?
Warm fruits grow better in warm seasons therefore high supply when its warm, low supply when its cold.
Weather events cause unavailable use of public infrastructure, e.g. supply routes of a good.
3.4 What is a surplus
A point on a supply and demand graph where supply outweighs demand.
3.4 How do businesses return a market to equilibrium when supply outweighs demand?
Businesses will lower prices to try and attract more customers, however at a lower price it may not be profitable for businesses to sell this product, and it will be attractive for consumers as the law of demand states as price decreases demand increases.
3.4 What is a shortage
A point on a supply and demand graph where demand outweighs supply
3.4 How do businesses return a market to equilibrium when demand outweighs supply?
Businesses will heighten prices to fill the shortage in supply and fulfil customers, however at a higher price price it is not be attractive for consumers to buy this product, and it will be more profitable for the businesses to supply these products, expanding supply.
3.4 What is allocative efficiency?
An allocation of resources in accordance to the amount consumers demand at that price = “allocative efficiency”. This helps achieve consumer sovereignty.
An efficient use of scarce resources (wastage associated with surplus is quickly corrected) = helping to solve the Economic Problem of unlimited wants and scarce resources.
3.4 What is the price mechanism?
How the interaction between demand and supply determine the price and quantities of the goods that get produced.
3.4 What are price mechanisms?
Incentive Function
Rationing Function
Signalling function
3.4 What is the incentive function?
Higher prices incentivises firms to provide more - expanding supply
3.4 What is the Rationing function?
Higher price rations lower supply by forcing consumers out of the market - contracting demand
3.4 What is the Signalling function?
Higher price signals agents that there is a change in market conditions that could be capitalised on - entrepreneurs take advantage of this
3.5 What is price elasticity of demand?
How responsive quantity demanded is to a change in price.
3.5 What is the substitution effect?
Some goods have more substitutes and thus the Substitution Effect is stronger.
For instance, some medicines have very few substitutes to switch to if price increases. In contrast, if the price of apples increases, there are plenty of other fruits to substitute towards.
3.5 What is the law of diminishing marginal utility?
The additional utility gained from an increase in consumption decreases with each subsequent increase in the level of consumption
3.5 How does the law of diminishing marginal utility relate to demand?
Some goods suffer diminishing returns more than others, and thus the Law of Diminishing Marginal Utility is stronger.
For instance, buying larger quantities of the same food quickly loses appeal.
3.5 What does perfectly inelastic demand refer to?
A change in price = no change in quantity demanded
3.5 What does relatively inelastic demand refer to?
A change in price = smaller change in quantity demanded
3.5 What does Unit elastic demand refer to?
A change in price = equal change in quantity demanded
3.5 What are factors that contribute to a good to have relatively more elastic demand?
- Luxuries
- Close substitute available
- Price change occurred a while ago
- Large proportion of income spent on good
3.5 What are factors that contribute to a good to have relatively more inelastic demand?
- Necessities
- Few or No Substitutes
- Price change is recent
- Insignificant proportion of income spent on good
3.5 What does relatively elastic demand refer to?
A change in price = larger change in quantity demanded
3.5 what does perfectly elastic demand refer to?
A change in price = complete change in quantity demanded
3.5 Why is price elasticity of demand important?
Price elasticity of demand informs business’ pricing strategy for their product by showing businesses how responsive consumers will be to a price change.
3.5 How do we measure price elasticity of demand?
Total Outlay Method
3.5 How do we use the Total Outlay Method?
- Calculate Total Outlay which is equal price x quantity demanded/quantity sold
- Second step of total outlay method is to determine the direction of the price change and the total outlay change between two points.
- Use the total outlay rules
3.5 What are the Total outlay rules and what does this tell us about price elasticity of deman?
Elastic: Price and Total Outlay move in the OPPOSITE DIRECTION
Unit Elastic: Price changes do not change Total Outlay.
Inelastic: Price and Total Outlay move in the SAME DIRECTION
3.6 What Is the general law of supply?
In general, if price goes up, suppliers are more willing to sell, and quantity supplied therefore increases
3.6 What does price inelastic supply refer to?
Change in price = little change in quantity supplied
3.6 What does price elastic supply refer to?
Change in price = large change in quantity supplied
3.6 What are factors that influence inelasticity of supply?
- No excess capacity
- Relative inability to hold stock
- Price change is recent
3.6 What are factors that influence elasticity of supply?
- Excess capacity
- Relative ability to hold stock
- Price change occurred a while ago
3.6 What does capacity of supply refer to?
When a producer is employing all their resources (FOP) at full capacity, they are relatively less able to adjust their level of production.
3.6 What does ability to hold stock refer to?
When it is easy to hold stock (a.k.a. inventories) producers can either run down their stock or build up their stock – thus allowing them to be more responsive to price changes.
3.6 What does price change occur to?
In the short term, quantity supplied can be slow to respond to a price change (a.k.a. “sticky”). If price rises, producers may be willing to produce more, but unable to; it takes time to hire new workers, build new factories, or order more inputs.
3.7 What does Market Concentration Refer to?
In markets that are “highly concentrated”, market power is “concentrated” in one or a few firms.
In other markets, firms have their market power “diluted” by the presence of a large number of competitors…
3.7 What is perfect/pure competition?
- There are many small firms in this market – a low market concentration.
- All firms are selling a homogenous (identical) good - zero product differentiation.
- Firms can only attract customers using their price – they compete against each other with lower and lower prices until they are earning zero economic profit. Firms are price takers and consumers have complete sovereignty.
3.7 What is Monopolistic competition?
- There are many small firms in this market, but not as many as in perfect competition – still a low market concentration, but not the lowest.
- Firms are selling similar goods, but they are engaged in product differentiation – aesthetically pleasing packaging, more eco-friendly, better customer service, additional garnishes.
- Firms can charge slightly different prices for their slightly different products – they are price setters to a small degree. This means slightly restricted quantity for the consumer, but more variety
3.7 What is an Oligopoly?
- A handful of big firms – a high market concentration, but not the highest.
= Firms may be selling goods that are homogenous OR have product differentiation. - Larger market power generally allows oligopoly firms to charge higher prices than firms in monopolistic competition – they are price setters to a larger degree. This goes hand-in-hand with lower quantity and lower variety for the consumer.
- New market entrants face high barriers to entry, such as high start-up costs, a limit on the number of licenses available, or cost advantages.
3.7 What is a Monopoly?
- One firm – the highest market concentration.
- Product has no close substitutes.
- Extremely high barriers to entry such as prohibitive start-up costs, network externalities, and laws prohibiting entry (such as patents).
- The firm is a price setter and can choose a price/quantity pair that maximises profit. This tends to be a high price and a low quantity.
3.7 How is a monopoly related to demand?
When a firm has significant market power such that they can raise their price without losing customers to competitors (inelastic demand!), we say they have “monopoly power” in that market, and we treat that firm like a monopolist.
3.7 What is a Geographical Monopoly?
The closest competitor is far away.
3.7 What is a Technological Monopoly?
Patents allow one firm exclusive selling rights.
3.7 What is a Natural Monopoly?
The existence of extreme economies of scale or network externalities causes an industry to be most efficiently serviced by ONE firm.
3.7 What are positive impacts of increasing market concentration?
- If the market is dominated by very large firms, they may achieve internal economies of scale, allowing for cost savings that might be passed on to the consumer (this pass-on effect is less likely the more concentrated the market is).
- Large firms with large profits are more able to invest into research and development or capital expenditure, pushing out the PPC.
- For a technological monopoly (monopolies based on copyright laws and patents), the existence of these super-normal profits may incentivise further research and invention.
3.8 What are Private Costs?
Borne or enjoyed by producers or consumers who have chosen to produce/buy the good/service.
- Cost of good or service being consumed (consumers)
- Production costs (producers)
3.8 What are Private Benefits?
Borne or enjoyed by producers or consumers who have chosen to produce/buy the good/service.
- Enjoyment of good or serve being consumed (consumers)
- Profit (producers)
3.8 What is an externality?
- Externality = when a third party who was not involved in choosing to incur the cost/benefit is affected.
- borne or enjoyed by society in general
- cost or benefit is rarely factored into private decisions
3.8 What are Social Costs/Negative Externalities
- Noise Pollution
- Habitat destruction
3.8 What are Social Benefits/Positive Externalities
Good for the environment, e.g. habitat reconstruction
Solar panels
