supply, demand, elasticity, taxes, subsidies & competition Flashcards
what are consumer protection laws
laws which protect consumers from exploitation and harmful business activities
list 3 competition policies
regulating the prices and service levels of monopolies
imposing fines on firms that abuse their market power
forcing monopolies to break up into smaller competition firms
what is competition policy
refers to measures governments use to control the behaviour of firms acting anti-competitively and against the interests of consumers
what is x-inefficiency
a monopoly may be poorly managed and inefficient if it does not face any competition
list 3 ways a monopoly may abuse its power
restrict market supply to force price up
restrict competition and consumer choice
cut product quality to save costs
what are natural barriers to entry
those barriers to entry which occur because large-scale production is often more efficient
what are artificial barriers to entry
those barriers created artificially and used by a monopoly to restrict competition
list two types of barriers to entry
artificial barriers to entry and natural barriers to entry
what are abnormal profits
excess profits above what they would be if there was competition
y do monopolies restrict supply
to force up the market price and earn abnormal profits
what is a monopoly
a single firm or grp of firms acting together with sufficient market power to restruct competition and set the market price
list 4 types of competition
perfect competition
monopolistic competition
oligopoly
monopoly
what is normal profits
the minimum amount of profit a firm needs to stay in the market
what are 2 differences between perfect competition and pure monopoly
in a perfect competition there are many suppliers with identical products and in a pure monopoly there is a single large supplier
in perfect comp, individual firms have no control over market price, in a monopoly, firms can determine market price
what can predatory pricing result in
damaging price wars
what is a disadvantage of cost based pricing
it takes no account of what consumers may be willing to pay or how much competition there is
cost plus pricing formula
tc/output + mark-up = selling price
what is cost pluw pricing
it involves estimating how many of the product will be produced and then calculating tc of producing this output and finally adding a percentage markup for profit.
why is price leadership done
to avoid price wars
what is price leadership
firms with the largest market share who are the price leaders will raise or lower its prices and other firms in the market will do the same.
what is price wars
involves setting the prices in line with the competitors price or just below their prices
what is predatory pricing
prices are cut down deeper often below the costs in order to destroy sales of new or existing competitor
when is price skimming used commonly
with products which are new inventions and ppl r willing to pay a premium price because of the novelty.
what is price skimming
this is when product is launched at a premium price.
when is penetration pricing usually followed
when there is a lot of competition and the product may not be unique
what is penetration pricing
involves setting the price lower than the competitors prices
list a cost based pricing strat
cost plus pricing
list 3 competitive pricing strats
predatory pricing
price wars
price leadership
list two demand based pricing strategies
penetration pricing
price skimming
list 3 types of pricing strategies
demand based pricing, competition based pricing. cost-based pricing
list 2 types of advertising
informative and persuasive
what is non-price competition
competing on all other product features other than price
what is price competition
competing with rival suppliers on product price
what are the 2 types of competition
price competition, non price competition
%change in price formula
p2-p1/p1 x 100
%change in qty formula
q2-q1/q1 x 100
list 2 disadvantages of subsidies
causes excess supply
distorts international competition
list 3 advantages of subsidies
used in agriculture to support farmers
encourages innovation
used to encourage production and lower cost of solar panels and turbines
what does a subsidy do
causes firms supply curve to shift to the right since cop is reduced.
what is a subsidy
incentive given by the government to individuals or businesses in the form of cash, grants or tax breaks that improve the supply of certain goods and services.
what does an ad valorem tax do
shifts up the supply curve by a certain percentage meaning the new supply curve will not be parallel to the original. The amount of tax per unit increases as price increases
what does a specific unit tax do
shifts up supply curve by the full amount of the tax so that the new curve is parallel to the original one.
what is an unit tax
set amount of tax per unit sold
what are the 2 types of indirect taxes
specific and ad valorem taxes
list 3 purposes of indirect taxes
- generate tax revenue for a government
- discourage consumption of harmful products
- encourage consumption of good productsq
what are direct taxes
those taxes which are levied on incomes of households and firms
what is a synonym for indirect taxes
expenditure taxes
what are indirect taxes
those taxes imposed by a government on goods and services.
what is perfectly inelastic supply
a change in price will not affect supply at all. PES = 0
what is perfectly elastic supply
at a certain price, producers are prepared to supply any amount. PES is infinite
what is inelastic supply
when changes in price result in smaller changes in qty supplied. PES<1
what is elastic supply
when changes in price lead to greater changes in qty supplied. PES>1
PES formula
%change in qty supplied/%change in price
what is PES
measure of responsiveness of quantity supplied to a change in price
what should a firm do if good is inelastic to make profits
increase price
what should a firm do if a good is elastic to make profits
reduce price
total revenue formula
P x Q
What is total revenue
amount paid by buyers and received by sellers of a good
what is unitary elastic demand
when change in price leads to equal changes in qty demanded. PED = 1
what is perfectly elastic demand
At a certain price, the demand of that product is infinite. PED is infinite
what is perfectly inelastic demand
rise or fall in the price of the product causes no change in the quantity demanded of the product. PED = 0
what is inelastic demand
when change in price leads to smaller change in qty demanded PED<1
what is elastic demand
when change in price leads to greater change in qty demanded. PED > 1
ped formula
%change in qty demanded/%change in price
what is price elasticity of demand
measure of responsiveness of qty demanded to a change in price
what happens to demand curve when there is an decrease in demand
shift in demand curve to left creating temporary surplus causing prices and quantity to go down
what happens to demand curve when there is an increase in demand
shift in demand curve to right creating temporary shortage which causes prices and quantity to increase
what happens to prices when there is a shortage
prices tend to rise until equilibrium is resoted
what is shortage
when the qty demanded exceeds qty supplied at a given price
what happens to prices when there is a surplus
prices tend to fall until equilibrium is restored
what is surplus
when the qty supplied exceeds qty demanded at a given price
what is equilibrium
when the qty supplied and qty demanded are equal. there is no surplus or shortage
what happens to a supply curve when theres an decrease in supply
shifts to left creating temporary shortage causing prices to increase and quantity to decrease.
what happens to a supply curve when theres an increase in supply
shifts to the right creating temporary surplus causing prices to decrease and quantity to increase.
when does a supply curve shift
whenever a non price factor influences supply changes
what is contraction of supply
ceteris paribus, decrease in quantity supplied due to the decrease in prices which leads to downward movement along the supply curve
what is extension in supply
ceteris paribus, increase in quantity supplied due to the increase in prices which leads to upward movement along the supply curve
what is law of supply
ceteris paribus, a higher price leads to a higher quantity supplied and that a lower price leads to a lower quantity supplied. there is a direct relationship between price and qty supplied
what is quantity supplied
the amount of goods and services producers are willing and able to sell to consumers at any given price.
what is decrease in demand
decrease in demand means that consumers now demand less of a product at each and every price than they did before, demand curve will shift to the left
what is increase in demand
it means that consumers now demand more of a product at each and every price than they did before, demand curve shifts to the right
what is extension in demand
ceteris paribus, when price decreases, quantity demanded increases, there is a downward movement along demand curve
what is contraction in demand
ceteris paribus, when price increases, quantity demand decreases. there is an upward movement along the demand curve
what is the law of demand
ceteris paribus, if price of a good or a service increases, quantity demanded decreases and vice versa. There is inverse relationship between price and quantity demanded
what is market demand
total demand for that product from all its consumers
what is individual demand
demand of just one customer
what is demand
willingness and ability to purchase a good or service at any given price
