the role of markets and money Flashcards
1
Q
market
A
a way of bringing together buyers and sellers to buy and sell goods and services
2
Q
market economy
A
an economy in which scarce resources are allocated by the market forces of supply and demand
3
Q
primary sector
A
the direct use of natural resources such as the extraction of basic materials and goods from land and sea e.g farming and mining
4
Q
secondary sector
A
all activities in an economy concerned with either manufacturing or construction
5
Q
tertiary sector
A
all activities in an economy that involve the idea of service eg. teaching, entertainment, health
6
Q
product market
A
where final goods and services are offered to consumers, businesses and the public sector
7
Q
what is the price determined by - product market
A
determined by the intersection of supply and demand for a good/ service
8
Q
factor market
A
where the services of the factors of production are bought and sold, e.g. skills of a workforce, suitability of land
9
Q
what is the price in a factor market affected by?
A
interaction of demand (depends on the demand for a good/service) and supply (labour from households in return for wages)
10
Q
interdependence of factor and product markers
A
households own the factors of production in the factor market and sell to firms. in the product market, households are the main buyers while firms sell the goods and services.
11
Q
specialisation
A
the process by which individuals, firms, regions and countries concentrate on producing those products they are best at doing - they may have to give up the making of other goods
12
Q
exchange
A
the giving up of something that an individual or firm has in return for something they wish to have, but do not possess - usually money is used
13
Q
what groups are affected by specialisation and exchange
A
producers, workers, regions and countries
14
Q
costs of specialisation for producers
A
- diseconomies of scale : as output increases, costs may rise, maybe resources in shorter supply or more people to manage workforce
- dependency - if one part of the process fails the whole production could stop
- maybe not able to buy necessary scarce resources, maybe if prices of those resources are raised by the producer
- if workers become bored and leave or produce less
15
Q
benefits of specialisation for producers
A
- higher output of goods
- higher productivity as workers become more skilled in one specific area
- higher quality because the best factors can be employed + you can buy the best components from specialists rather than making them
- bigger market for each product means there should be more buyers for each product we
- economies of scale bc of larger output
- time saving because only one product is made, no stopping to start and finish another product
16
Q
what is specialisation by individuals called
A
division of labour
17
Q
benefits of specialisation for workers
A
- increased skill level leading to more money being earned (through bonuses, promotions etc)
- workers doing what they’re best at leads to them becoming more skilled
- doing what they’re good good at uncreated job satisfaction meaning more motivation and more money
- increased standard of living by earning more
18
Q
costs or specialisation for workers
A
- boredom leading to demotivation
- deskilling because they lose skills to other types of work and can’t respond to changes in demand
- unemployment if there’s a fall in demand for the product they specialise in and also replaced by machines
19
Q
specialisation in regions
A
regions within a country can specialise in specific areas like coal in the north
20
Q
benefits of specialisation for regions
A
- a region uses its own resources efficiently
- creates jobs for residents
- development of better infrastructure and therefore supply industries that will develop the region
21
Q
costs of specialisation for regions
A
- if demand falls then the industry may collapse
- if resources run out then those in the induration will become unemployed
- loss of advantage if another region becomes better at producing the specialised product leading to unemployment
22
Q
benefits of specialisation for countries
A
- greater efficiency and output when doing what they do best
- more output leads to more investment and jobs
- international trade means more products for its own people
- increased choice, income, output and infrastructure meaning better standard of living
- government revenue increased leading to better school, hospitals etc
23
Q
costs of specialisation for countries
A
- as specialisation for a country changes, workers in that industry become unemployed
- if world demand changes then the economy may collapse if the country over specialises
- over exploration of resources so unsustainable development or environmental damage
24
Q
demand
A
the quantity of goods and services that consumers are willing and able to buy at a given price in a given period of time, usually varies inversely with price
25
individual demand
the demand for a good or service by an individual consumer, shows how much a consumer is prepared to buy at different prices not what theyactually will buy
26
market demand
the total demand for a good or service round by adding together all individual demand
27
shifts of the demand curve
a compete movement of the existing demand curve either outward or inward
28
movement along the demand curve
when the price changed (due to change in supply, leading to a contraction (up) or expansion (down) the demand curve
29
what causes shifts of the demand curve
- increase in income - consumers can buy more products at every price
- increased in marketing - persuades consumers to demand more products at every price
- changes in taste and fashion - if something becomes trendy the demand will increase
- preference for a substitute - some people might like pepsi more than coke so demand for pepsi will increase
- complementary goods - if the price for one good falls then the demand for any good that goes with it will increase like cars and petrol
- expectations of prices to rise - consumers will buy more products now to save money in the future like sales
- population changes - more population means more demands, gender patterns and ageing population means different goods are more popular
- government prices - a subsidy or cut in tan will increase consumer demand
30
subsidy
an amount of money a government gives directly to forms to encourage production and consumption
31
Consequences of shifts of demand
In nearly all situations a shift leads to price and quantity moving in the same direction
32
exceptions to quantity and price both rising/falling (shift of demand curve)
- If income rises faster than prices then consumers can demand more
- if a substitute is preferred then demand will fall even if price increases
- if the increase in demand allows firms to gain economies of scale, they could cut prices leading to an increase in demand
- if demand falls a form could go out of business
33
What causes movements along the demand curve
caused only by a change in price/supply
34
Consequences of movements along the demand curve
Price and quantity move in opposite directions
35
What is the effect of contraction of demand
Price rises, quantity falls
Effect on consumers : buy fewer goods, buy cheaper substitutes
Effect on firms : sales and profits fall, may need fewer workers
36
What is the effect of expansion of demand
Fall in price, rise in quantity
Effect on consumers : buy more and better goods
Effect on firms : increase supply and profit, employ more workers
37
Firm
A single supplier of a specific good or service
38
Industry
All of the firms which supply a specific good or service
39
Utility
The satisfaction received from the consumption of a good or service
40
Necessity
Essential for survival
41
Luxury
A ‘nice to have’ but not essential good/service
42
PED
The responsiveness of quantity demanded to a change in the price of a product
43
Elastic demand
When the % change in quantity demanded is greater than the % change in price
44
Values of PED
PED 0 - perfectly inelastic
PED ∞ - perfectly price inelastic
PED -1 - unitary price elastic
PED more than -1 (eg. -2, -3.5, -6) - price elastic
PED less than -1 (e.g. 0 or 0.25) - price inelastic
45
What do PED and PES values have to have
always include the - sign in the PED value to shows the demand curve sloping downward, PES is always + due to the positive slope
46
5 PED curves
Price elastic, price inelastic, perfectly price inelastic, perfectly price elastic, unitary price elastic
47
What is the importance of PED for consumers
- if the product they buy has inelastic demand they can face price rises as suppliers can pass on cost increases
- the government can impose high taxes easing prices if the product has inelastic demand
- allows them to make choices if substitutes available
- consumers PED depends on factors like weather/ time if day (eg train times)
48
Importance of PED for producers
- allows producers to maximise their total revenue
- can charge different prices to different groups for the same product
- can affect their decision whether to supply the product or not
49
Revenue equation
Total revenue = price x quantity
50
The effect of a price change on total revenue : demand is price elastic
Decrease in price : revenue increases because 🔺q > 🔺p
Increase in price : revenue decrease because 🔺q> 🔺p
51
The effect of a price change on total revenue : demand is price inelastic
Price decreases : tr decreases because 🔺q<🔺p
Price increases : tr increases because 🔺q
52
Calculating PED values
PED = - %🔺q / %🔺p
53
Supply
the quantity of goods and services that producers are willing and able to supply at a given price in a given period of time, usually varies directly with price
54
What causes a movement along a supply curve
It is caused only by a change in price/ demand
55
Causes of shifts of the supply curve
- increases in costs of production - producers would supply less at each price
- increase in taxes and subsides
- new technology - fall in costs so rightward shift
- climate change - in agriculture can cause less to be supplied
- increases in producers/ size of firms - more supplier at every price so rightward shift
- government regulation - increase in costs so shift to the left
56
Shift of the supply curve
A complete movement of the existing supply curve either outward or inward showing either more or less supplied at every price
57
Consequences of shifts in supply
- Gain greater economies or scale - greater profits for the producer and lower prices for consumers
- increases in efficiency - increase in profit and possibly greater productivity
- increases in exports - greater economies of scale, increases in efficiency and fall in price makes firm more competitive
- increase in sales - in price falls consumers will buy more leading to increase in profit
- becoming a monopoly/oligopoly - a more competitive firm gains market share and forces competitors out
58
Consequences or price rising (movements along the supply curve)
Change in quantity: rise
Effect on producers: initial increase in profits, but then more firms enter the market shifting supply to the right which might reduce profit
Effect on consumers : products are initially more expensive but then price falls - consumers have more choice and can buy more products
59
Consequences of fall in price (movements along the supply curve)
Quantity falls
Effect on producers : reduction in profits, less efficient firms forced our, reduction in output
Effect on consumers ; consumers can afford more but now have less choice
60
PES
The responsiveness of quantity supplied to a change in the price of the product
61
Elastic supply
Percentage change in quantity supplied is greater than the percentage change in price
62
How to calculate PES
+ % change in supply / % change in price
63
Values of PED
0- no change in quality as price changes
Between 0 and 1 - change in quantity is less than change in price
1 - change in quantity is equal to the change in price
Between 0 and ♾️ - change in quantity is more than the change in price
♾️ - an infinite amount can be supplied at the given price, no change in price
64
Unitary supply
When the % change in supply is the same as the % change in price
65
Five PES curves
Price inelastic, price elasticity perfectly price inelastic, perfectly price elastic, unitary price elastic
66
PES for consumers
- if supply is inelastic for the product, they will face high prices to obtain more
- if the product has very inelastic supply they maybe couldn’t get more as quantity is fixed eg tickets
- if the product has elastic PES then its easy to purchase more
67
PES for suppliers
- firms would prefer an elastic supply because it’s easier to respond to price changes
- more elastic supply enables a firm to be more flexible for consumers
- very inelastic supply means price depends on demand
68
How to increase PES
- upgrade to latest technology
- creating spare capacity
- improving storage methods to prolonging life of a product
- keep large amounts of stock
- train employees to perform a large range of jobs
69
price
the sum of money paid by a consumer to a producer for a good or service. it is determined by the interaction of supply and demand
70
efficiency
the optimal production and distribution of scarce resource
71
worth vs price
how much customer feels a product is worth to them and that then determines what price people are willing to pay for different products
72
what is the role of price in a market economy
how scarce resources are allocated between competing users: signalling, transmission of preferences and rationing
73
signalling
price changes to single where resources are needed, of price rises then more resources are required and vice versa.
for example, since people are worried about climate change so many wind farms have been built with guaranteed prices given to the owners by the government. this means resources move from coal stations to wind farms
74
transmission of preferences
through choices producers can send information to suppliers about changing needs. higher prices encourage suppliers to supply and vice versa
for example, the government has shown their support for green energy which encouraged suppliers to buy more of it
75
rationing
prices help to ration scarce resources since scarce resources cause the price to rise so only those able to buy the product can
eg football stadiums will raise their prices since they are too small for all fans
76
equilibrium price and quantity
where the quantity supplied exactly matches the quantity demanded
77
why is equilibrium price and quantity desirable
it is assumed the markets will always move toward this anyways since excess supply can only be gotten rid of by lowering the price. equilibrium means there is no excess or shortage of supply making it efficient
78
determination of price
the interaction of the free market forces of demand and supply to establish the general level of price for a good or service
eg; of a price is too low, no one will buy that product so the company is forced to lower it
79
surplus
- forces prices down
- demand expands
- supply contracts
- continues until equilibrium is reached
80
shortage
- forces prices up
- demand contracts
- supply expands
- continues until equilibrium is reached
81
allocation of resources
how scarce resources are distributed among producers and how scarce goods and services are allocated among consumers
82
market forces
factors that determine price levels and the availability of goods and services in an economy without government intervention
83
effect on equilibrium price and quantity if demand shifts to the right
demand increases, equilibrium price increases and equilibrium quantity increases
84
effect on equilibrium price and quantity if demand shifts to the left
demand decreases, equilibrium price decreases and equilibrium quantity decreases
85
effect on equilibrium price and quantity if supply shifts to the right
supply increases, equilibrium price decreases, equilibrium quantity increases
86
effect on equilibrium price and quantity if supply shifts to the left
supply decreases, equilibrium price increases, equilibrium quantity decreases
87
competition
where different firms are trying to sell a similar product to a consumer
88
price competition
firms lower their prices to gain customers and market share.
any firm not being able to achieve this will lose customers and go out of business
firms however cannot sell at less that cost = price or will go out of business too
89
non-price competition
- small producers offering a specialist, more personalised product
- convenient location
- this type of competition often leads to customer loyalty
- marketing by creating a brand and being more known to the public
90
why do producers compete
- to enter a market : new business or new product by advertising or offering a low price and then act existing producers to respond
- survival : for customers and market shares. persuading existing customers to retur and enticing new customers. can be done by extending a new range of products e.g supermarkets introducing a banking/ opticians/ electrical goods
- profit : means for investment to survive and grow via innovation and expansion. good innovation leads to being able to compete strongly in he market. eg. apple introducing new models and technology for phones
91
how does competition affect price
competition can drive prices down so that total revenue = cost.
supply shifts right
this leads to an increase in quantity bought and sold and a fall in price.
the extent of the fall depends on the PED of the product
92
how can competition lead to higher prices
- marketing costs will pass onto consumers eg branded vs generic
- innovation and inventions can lead to higher prices, if you're the first you can charge a higher price but as competitors produce similar products prices fall
93
positive economic impact of competition on producers
- forces producers to improve their efficiency so reducing costs, eg. innovation, and improved technology
- improved technology then improves the productivity of fop and leads to growth in the economy
- this then leads to growth in the economy and then increased demand leading to greater profits for more efficient producers ad then expands output to meet demand
94
negative economic impact of competition on producers and workers
- those slow to adapt to more technology will go out of business
- workers may be fired if new technology leads to them not being needed
95
positive economic impact of competition on consumers
- competition leads to a fall in price
- improves choice, variety and quality of goods/ services
- consumer sovereignty ( freedom of choice and therefore control over market supply) so more products that customers want at a price they want to pay -> leads to increased customer standard of living, e.g falling price of food
96
negative economic impact of competition on consumers
- producers can introduce goods like pesticides which can be harmful to consumers
- advertising can cause consumers to buy goods they don't need
- can decrease costs then increase them when customers are addicted
- low cost airlines actual have a lot of extra charges to travel comfortably as the cost of such a cheap flight
97
monopoly
a sole producer or seller of a good or service, the absence of competition, control 25% of the market
98
monopoly features:
size
no. of firms
control of prices
level of price and output
efficiency
- very large
- one firm
- able to set the price but cannot control the quantity
- a higher price and produce a smaller quantity
- not seen as efficient but can be if they gain large economies of scale and can therefore charge lower prices
99
barriers of entry for a monopoly
- legal ones - eg only riyal mail can deliver mail
- greater efficiency than rivals due to large economies of scale which reduces costs
- location - even a small post office if its the only one in the area can be a monopoly
- copyrights and patents prevent copying
100
oligopoly
a small number of firms control a large majority of market share, 5 largest must control 50%
101
barriers of entry for oligopoly
- barriers are not sufficient to prevent existence of smaller firms entering and increasing competition
- any decision about the price made about any of the firms will affect their rivals and result in a quick response
- often try to control the market by agreeing on a set price to avoid price competition which illegal in the UK (collusion)
102
oligopoly features:
size
no. of firms
control of prices
level of price and output
efficiency
- can be large but may have smaller firms
- a few firms
- can influence price but is restricted by rivals
- both price and quantity depend on how strong competitors are and ability to collude
- usually not seen as being economically efficient
103
competitve features:
size
no. of firms
control of prices
level of price and output
efficiency
- relatively small
- many firms
- price is set by market forces of supply and demand
- price and quantity and decided by market forces and in theory lower prices and higher quantity
- lead to economic efficiency
104
profit
the difference between the revenue received from the sale of a good or service and the costs involved in making/ selling the good including opportunity costs
105
individuals as producers
- can produce non-market good or services
- may only work part time
- self employed so and keep all the profits
106
firms as producers
- can be very small businesses to huge corporations
- can sell to at many different scales
- competition, oligopolies and monopolies
- larger producers exert power over markets by limiting supply to lower prices and drive out competitors
107
government as producers
public sector: i.e. NHS and police
used to produce goods like coal before they were privatised
108
production
the total output of goods and services produced by a firm or industry in a period of time
109
what does an increase in production lead to
- increase in employment unless caused by larger productivity
- an increase in profits for firms and industries
- larger economies of scale
- an increase of market shares
- economic growth
- a rise in the standard of living
110
productivity
a measure of the degree of efficiency in the use of fop in the production process, measured i output per unit of input
111
productivity equation
total output / total input
112
what does productivity depend on
- improving the inputs to the production process
- better technology, education and training, better quality raw materials
113
why is high productivity important
- lower average costs and increasing economies of scale making a firm is more competitive
- greater profits by attracting best workers and equipment/research
- better economic growth and development
- more jobs and higher wages
114
costs of productivity
- uses capital equipment instead of labour which can increase unemployment
- greater international competitiveness leading to a fall in GDP
115
total cost
all costs of the firm added together e.g raw materials (variable costs) and marketing, machinery costs (fixed)
116
total cost equation
total fixed cost + total variable cost
117
average cost
the cost of producing a unit
118
average cost equation
total cost / quanitty
119
total revenue
the total income of a firm from the sale of its goods and services
120
total revenue equation
price x quantity
121
average revenue
the revenue per unit sold
122
average revenue equation
total revenue / quantity
123
loss
when a firm's revenue is less than costs
124
economies of scale
the cost advantages a firm can gain by increasing the scale of production, leading to a fall in costs
125
internal economies of scale
- technical economies - large firms can purchase specialist equipment
- economies of increased dimensions - larger tankers and container ships,
- bulk-buying economies - buy at a lower cost per unit
- division of labour - large firms can divide tasks so specialised workers
- financial economies - large firms can borrow money from banks easily at lower interest
- managerial economies - can afford to employ specialist staff
- marketing economies - can use more expensive methods that reach more potential customers such as newspapers. marketing costs per unit falls
- risk bearing economies - can offer a larger range of goods and if one area loses sales can rely on the others
- research and development economies - can afford it to stay in front of competitors
126
external economies of scale
- better transport links
- education and training facilities nearby
- concentration of firms, eg if supplier is near then transport costs cut
- location - better reputation/hotspot of firms or just more accessible
127
analysis of cost
- if costs fall then firm can supply more at every price and supply curve shifts to the right
- if costs rise the opposite is true and less is supplied at every price
128
analysis of revenue
- growth, eg. new equipment and investment
- secure loans and favourable interest/ overdrafts with suppliers, works
- confidence in the firm on the part of workers, suppliers and partners since more workers will stay on and suppliers will be confident in getting paid back
129
analysis of profit
- signals to scarce resources to move to firms making the most profit since more profits show more efficient use of resources so success of investment banks, suppliers, customers and entrepreneur
- attracts other producers to move to that market
- important source of finance to put back into the business for investment and growth
130
analysis of loss
can cause a business to shut or rely on loans and in the long term still close
- causes fop to leave it to find an industry making profit
131
labour market
where workers sell their labour and employers buy the labour: it consists of households' supply of labour and firms' demand for labour
132
why does labour lack mobility
- lack skills required
- unwilling to relocate eg don't know another language
- personal ties prevent them from moving
- lack information about the jobs available
133
supply of labour
the total number of people who are willing and eligible to supply their labour, including the unemployed
134
factors affecting the demand for labour
- state of the economy ~ growing economy requires more jobs
- more demand for a product means more demand for labour to produce it
- wage rates, as wage decreases, the demand increases
- a fall in real wages persuades employers to employ more people
- productivity of labour : labour could become cheaper than capital
- profitability of firms - large profits make companies expand and hire more people
135
factors affecting supply of labour
- wage rate: higher the wage, higher the supply
- incentives like bonuses or overtime payments
- size of the working population
-working conditions, opportunity for promotion, job security
- barriers to entry: qualifications needed and training time
- education and training availability
136
market for ceos vs market for shop assistants
137
gross pay
the amount of money that an employee earns before any deductions have been made
138
income tax
a tax levied directly directly on a personal income
139
net pay
the amount of money that an employee is left with after deductions are made from the gross income
140
national insurance
contribution paid by workers and their employers toward the cost of state benefits
141
pension contributions
payments made to a pensions fund. for employed people this comes from: employee, employer and the government
142
money
anything that is generally accepted as a means if payment for goods and services
143
barter
involves the "double coincidence of wants"
money is more suitable and efficient
144
medium of exchange
anything that sets the standard of value of goods and services acceptable to all parties involved in a transaction
145
financial sector
consists of financial organisations and their products, involves the flow of capital
146
role and importance of the financial sector
- helps markets to function and for economic activities to be carried out in a regulatory framework
- involves the lending and borrowing of money done through financial institutions
credit provision - allow consumers to buy now and pay later, credit cards, gives people and opportunity to buy homes, same with firms and promotes growth, governments also use credit
liquidity provision - banks allow for assets to turn into cash ~ such as overdraft facilities
risk management - prevents savers from losing all of their money since savings and invested into a range of companies so if one fails, its alright
147
role of the central banks
- issues bank notes
- set the bank rate to control monetary policy
- provide financial stability by making financial organisations trustworthy
- manage a country's foreign reserves and intervene in a foreign market if necessary
- act as a bank for commercial bank
- act as a bank for the government
148
investment
the purchase of capital goods that are used to produce future goods and services. it is also an asset purchased to provide an income in the future and/or sold at a profit
149
interest rate
the cost of borrowing money, i.e that which is paid to the lender. it is also a reward for saving
150
role of commercial banks
- accept deposits, pay interest on them and keep savings safe
- make payments on behalf of their customers by accepting cheques, card and mobile payments
- issues loans to people and firms and provide overdraft facilities
- offer safe deposit boxes for valuable items
- provide foreign currencies
151
building society
a mutual financial institution that is owned by its members. its primary objectives are to receive deposits from its member s and to lend money to members to purchase property
- limited in the amount of money they can borrow from the money market
152
mortgage
an agreement with a financial institution to borrow money to purchase a property
153
insurance companies
financial institution that guarantees compensation for specified loss, damage, illness or death in return for an agreed premium
154
savings
a part of person's disposable income which isn't spent on consumption - this is done by savers
155
how do interest rates affect the level of saving
as interest rates are raised, savers will save more
156
borrowing
to receive money from another party with the agreement that the money will be repaid
157
how do interest rates affect borrowing
higher rates decrease the rate of borrowing because borrowing becomes more expensive and their current payments too
encourages people to save not spend, they purchase less goods and services, this land deter firms from borrowing because their revenue falls
a rise in interest leads to an increase in the foreign exchange value of the pound, this makes exports less competitive so firms will sell less and reduce borrowing
158
how do interest rates affect investment
investment in inverse to the rate of interest.
fall in interest rate means borrowing is cheaper for investment and there is a lower opportunity cost involved in sacrificing saving
lower interest encourage customers to spend and firms will want to expand to meet this rise in demand
however this depends on the economy, if firms and consumers lack confidence, firms might not invest more because they don't expect more demand
