The Economic Environment of Business and Finance Flashcards
Why does quantity demanded increase when price falls
Lower prices make goods more affordable
Lower relative prices make the goods more attractive
What are some determinants of demand
Price of the good itself Price of other goods Substitutes Complements National income Fashion Population size Credit terms
What factors can cause the demand curve to shift
Increase in household income
Increase in price of substitutes
Decrease in price of complements
What factors can cause the demand curve to shift
Increase in household income
Increase in price of substitutes
Decrease in price of complements
What is price elasticity demand (PED) and how is it calculated
The degree to which demand is affected by changes in the selling price
PED = (%change in demand / %change in price)
What are the factors affecting PED
Readily available substitutes = more elastic
Short run demand = more elastic
Competitors differing prices = more elastic
Luxuries = more elastic
High proportion of income = more elastic
What PED values characterise Elastic, Inelastic and Unitary Elastic demand
PED < 1 for Inelastic
PED > 1 for Elastic
PED = 1 for Unitary
What effect does elasticity have on revenue
Inelastic: Increasing price will increase total revenue even though fewer units are sold
Elastic: Increasing price will decrease total revenue and fewer units will be sold, price must be cut to increase revenue
What is income elasticity of demand (YED) and how is it calculated
Looks at the degree to which demand is affected by changes in household income
YED = (%change in demand)/(%change in household income)
What YED values characterise normal, inferior and luxury goods
YED > 0 for normal goods
YED < 0 for inferior goods
YED > 1 for luxury goods
What is cross elasticity of demand (XED) and how is it calculated
XED looks at the degree to which demand is affected by changes in the price of other products
XED = (%change in demand for product A)/(%change in price for product B)
What XED values characterise substitutes, complementary goods and unrelated goods
XED > 0 for substitutes
XED < 0 for complementary goods
XED = 0 for unrelated goods
What is price elasticity of supply (PES) and how is it calculated
PES looks at the degree to which supply is affected by changes in the price
PES = (%change in supply)/(%change in price)
What are the meanings of perfectly inelastic and elastic supply
perfectly inelastic: supply remains constant at all prices
perfectly elastic: supply is infinite at a particular price
What are some determinants of supply
Price of the good Price of other goods Costs Change in technology Weather/Harvests/etc.
What is the equilibrium price
The price at which supply and demand are equal
What happens if the price is too high on a supply vs demand graph
Supply will exceed demand causing a surplus
Retailers would have unwanted goods, returns, reduced orders
Supplier will respond by lowering prices
What happens if the price is too low on a supply vs demand graph
Demand will exceed supply causing a shortage
Retailers will have empty shelves, queues, increased orders
Suppliers will increase prices to reduce shortage
Why might the government intervene and try and regulate prices to either a maximum or a minimum
Setting a maximum price:
To ensure that essential goods are affordable
To limit inflation
Setting a minimum price:
To protect suppliers
What are the four factors that affect GDP
Land
Labour
Capital
Entrepreneurship
What are the four stages of the business/trade cycle
Recession
Depression
Recovery
Boom
What are the characteristics of a recession
Consumer demand falls
Businesses sell fewer goods
Business failure occurs
Production and employment fall
Usually happens quite quickly due to the speed at which declining demand is felt by businesses
What is inflation and deflation
Inflation: Is the increase in price levels and decline in purchasing power
Deflation: falling prices, associated with low rates of growth and recession
Why is inflation a problem
Fewer people can afford goods
Exports fall as imports appear cheaper
Consumers may stockpile fearing price increases
What are the two types of inflation
Cost-push inflation: Resulting from increases in costs of production
Demand-pull inflation: Resulting in persistent excess of demand over supply
What are the two main causes of demand-pull inflation
Fiscal: Government spending increase or a reduction in tax
Credit: Levels of credit to customers increased
What are the effects of a rise of interest rates
Price of borrowing in the economy will rise
Reduced borrowing and investment in non-current assets
Increase in saving and reduce in spending
Reduces the aggregate demand in the economy
What is a government expansionary fiscal stance
Government spending > taxation = increased borrowing
What is a government contractionary fiscal stance
Government spending < taxation = reduced borrowing
What are government macroeconomic policies and what are some examples
Policies used by the government to grow the economy and control inflation
Monetary policy (interest rates)
Quantitative easing
Fiscal policy
Supply side
What is fiscal policy
The government’s policy on government spending, taxation and borrowing
What is quantitative easing
Using the central bank (Bank of England) to buy financial assets using electronically generated money
What is monetary policy
Government policy on interest rates, exchange rates and money supply
What is supply-wide economics
Policies designed to encourage suppliers to produce more goods at a lower price
What are the four main types of market structure
Perfect competition
Monopolistic competition
Oligopoly
Monopoly
What are the characteristics of a perfect competition market
Large number of buyers/sellers all unable to influence market price
Identical cost structures and products
Single selling price across market
What are the characteristics of a monopoly
One supplier and many buyers
High barrier to entry
Suppliers can fix price or quantity
What are the characteristics of monopolistic competition
Many buyers and sellers
Some differentiation of products/prices
Some customer loyalty
What are the characteristics of an oligopoly
Few large suppliers
Differentiation of products but price wars
Collusion to form cartels
