The Role of Markets 2.1-2.3 Flashcards
How does market economy allocate resources (invisible hand)
If people maximise their own benefit, then everyone else will benefit from them.
If people want something they will buy it. Suppliers will increase the supply of what people want
What is a market?
A set of arrangements that allows transactions to take place where buyers and sellers meet
Characteristics of a Market
A physical place
willingness to trade or exchange goods
Competitive and price driven system
What is a Sub-Market
a recognised or distinguishable part of a market, also known as a market segment
How does a Market Work?
By a Barter System.
Bartering is the exchange of goods and services without the use of money.
It is also a type of exchange in which a DOUBLE COINCIDNECE of wants is needed.
function of signalling
If price falls:
it signals to consumers that a product is relatively cheap and they are likely to increase purchases
it signals to suppliers that price has fallen and to remain competitive they need to reduce prices
function of rationing
when there is a shortage of a product, the price will increase and deter consumers from buying the product.
This leaves those with the willingness and ability to pay buy them.
function of incentives
if market price for product A goes up, it acts as an incentive for producers to supply more to increase profit.
Also will act as incentive for consumers to buy less.
functions of price in the market
ALLOCATION - allocating scarce resources among competing uses
INCENTIVE - when the price of a product rises, quantity supplied increases as a business
Functions of Money
must be acceptable to buyers and sellers
must act as a store of value
be a standard of deferred payment
Factors that influence demand
Consumer Income
Availability of substitutes
Consumer Preferences
What is the Division of Labour
If workers specialise in a task, production process can be broken down into series of seperate processes.
This then results in high productivity.
What is specialisation?
The concentration by a worker or worker workers, form, region, or whole economy on a narrow range of goods and services
Advantages of Specialisation
allows a country to make full use of their economic resources
increases the scale of production
surplus can be exported
Disadvantages of Specialisation
over-specializing and structural unemployment
over extraction of a country’s natural resources
What is notional demand?
This reflects a consumers wants, which are theoretically unlimited
What is effective Demand
When a consumer is willing and able to buy something that they want
What is the Law of Demand?
There is an inverse relationship between the price of a product and the quantity demanded assuming ceteris paribus
Demand Curves
show the relationship between the quantity demanded and the price of a product
DEMAND SCHEDULE - data that is used to draw the demand curve of a product
What is contraction and expansion?
CONTACTION - increase in price causes contraction in demand
EXPANSION - decrease in price causes an expansion in demand
What is joint demand?
Where two or more products or services are used together
What is composite demand ?
Where goods are demanded for different purposes e.g milk yoghurt cheese
What is competitive demand ?
where a good is purchased as an alternative to another good
What is a normal good ?
A good for which an increase income leads to an increase in demand
What is an inferior good?
A good for which an increase in income leads to a fall in demand
What are substitute goods ?
Goods that compete with one another consumers regard them as alternatives.
When the price of a good increases, the demand for substitute will also increase
What are complementary goods ?
Goods for which there is a joint demand.
If the price of a good increases, demand for complementary good is likely to fall
e.g toothbrush + toothpaste
How does time effect demand?
Some goods are consumed over a long period of time.
Some goods are bought for investment and not consumption
What is supply ?
The amount of a product put onto the market by firms at various given prices in a particular time period
Firms in Supply
Economics assume that behaviour of suppliers is governed by the need to maximise profits
What is individual supply ?
the amount supplied by one firm
What is market supply ?
sum of supply by every firm in a market
What is meant by joint supply ?
production of one good automatically leads to supply of another
What is competitive supply ?
supplier can only supply more of one product by producing less of another
Supply curve
shows the relationship between the quantity supplied and the price of a product
the determinants of supply
costs of production
technology of production
price of other related goods
government policy
firms expectations about future prices
size and nature of the industry
