The Role of Markets 2.1-2.3

Question 1

How does market economy allocate resources (invisible hand)

Answer 1

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

Question 2

What is a market?

Answer 2

A set of arrangements that allows transactions to take place where buyers and sellers meet

Question 3

Characteristics of a Market

Answer 3

A physical place
willingness to trade or exchange goods
Competitive and price driven system

Question 4

What is a Sub-Market

Answer 4

a recognised or distinguishable part of a market, also known as a market segment

Question 5

How does a Market Work?

Answer 5

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.

Question 6

function of signalling

Answer 6

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

Question 7

function of rationing

Answer 7

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.

Question 8

function of incentives

Answer 8

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.

Question 9

functions of price in the market

Answer 9

ALLOCATION - allocating scarce resources among competing uses
INCENTIVE - when the price of a product rises, quantity supplied increases as a business

Question 10

Functions of Money

Answer 10

must be acceptable to buyers and sellers
must act as a store of value
be a standard of deferred payment

Question 11

Factors that influence demand

Answer 11

Consumer Income
Availability of substitutes
Consumer Preferences

Question 12

What is the Division of Labour

Answer 12

If workers specialise in a task, production process can be broken down into series of seperate processes.
This then results in high productivity.

Question 13

What is specialisation?

Answer 13

The concentration by a worker or worker workers, form, region, or whole economy on a narrow range of goods and services

Question 14

Advantages of Specialisation

Answer 14

allows a country to make full use of their economic resources
increases the scale of production
surplus can be exported

Question 15

Disadvantages of Specialisation

Answer 15

over-specializing and structural unemployment
over extraction of a country’s natural resources

Question 16

What is notional demand?

Answer 16

This reflects a consumers wants, which are theoretically unlimited

Question 17

What is effective Demand

Answer 17

When a consumer is willing and able to buy something that they want

Question 18

What is the Law of Demand?

Answer 18

There is an inverse relationship between the price of a product and the quantity demanded assuming ceteris paribus

Question 19

Demand Curves

Answer 19

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

Question 20

What is contraction and expansion?

Answer 20

CONTACTION - increase in price causes contraction in demand
EXPANSION - decrease in price causes an expansion in demand

Question 21

What is joint demand?

Answer 21

Where two or more products or services are used together

Question 22

What is composite demand ?

Answer 22

Where goods are demanded for different purposes e.g milk yoghurt cheese

Question 23

What is competitive demand ?

Answer 23

where a good is purchased as an alternative to another good

Question 24

What is a normal good ?

Answer 24

A good for which an increase income leads to an increase in demand

Question 25

What is an inferior good?

Answer 25

A good for which an increase in income leads to a fall in demand

Question 26

What are substitute goods ?

Answer 26

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

Question 27

What are complementary goods ?

Answer 27

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

Question 28

How does time effect demand?

Answer 28

Some goods are consumed over a long period of time.
Some goods are bought for investment and not consumption

Question 29

What is supply ?

Answer 29

The amount of a product put onto the market by firms at various given prices in a particular time period

Question 30

Firms in Supply

Answer 30

Economics assume that behaviour of suppliers is governed by the need to maximise profits

Question 31

What is individual supply ?

Answer 31

the amount supplied by one firm

Question 32

What is market supply ?

Answer 32

sum of supply by every firm in a market

Question 33

What is meant by joint supply ?

Answer 33

production of one good automatically leads to supply of another

Question 34

What is competitive supply ?

Answer 34

supplier can only supply more of one product by producing less of another

Question 35

Supply curve

Answer 35

shows the relationship between the quantity supplied and the price of a product

Question 36

the determinants of supply

Answer 36

costs of production
technology of production
price of other related goods
government policy
firms expectations about future prices
size and nature of the industry