The role of markets (MICRO) Flashcards
what is specialisation
.focusing on one activity to be able to produce more efficiency
e.g. training a worker to be a specialist on engines instead of a general car builder
what is the division of labour
spliting up a task into smaller activites to be able to produce more efficiently
e.g. having one worker bulid a part of a car instead of only one worker for the whole car
evaluation of specialisation and the division of labour
pros:
.quicker production process
.able to produce more g+s
.lower average cost of production
cons:
.can be demotivating as the workers only work on the same small task
.if a worker is absent or capital is broken = it stops the whole production
.can be a barrier of entry as it takes alot of money to specialise workers and investment
pros depend on:
.the type of good e.g. cutting hair isn’t going to gain from specialisation and division of labour
.the changes in technology lead to firms to buy new specialised capital and retrain workers as the process changes oftern which firms might not be able to afford
what is the barter system
system of exchanging one product for another without using money as a medium of exchange
.it is good for people who specialise as they can trade with other specialists to have a variety of goods to consume from
what is demand
consumers williningness and ability to purchase a g+s at a price
what is joint demand
when products are demanded together making them complements
what is competitive demand
when consume one product over another making them subsitutes
what is composite demand
when a product is demanded for multiple uses
how do movements along the demand line occur
due to price changes
contraction = increase in price = decrease in QD
extension = decrease in price = decrease in QD
how do shifts in the demand line occur
.any non-price factor shifts the demand curve
what are some factors that shift D
income
price of complementary goods
price of substitute
.taste
advertising/marketing
population
what is supply
ability and willingness of a firm to sell products in the market at a given price
individual supply
what one firm is willing and able to sell at a given price
market supply
combinations of decisions to supply at different PL
relationship between price and quantity supplied
positive relationship
higher price = higher incentive for firms to supply products
what is joint supply
when products are supplied together
.normally as a by product
e.g. beef and milk from cows
what is competitive supply
when producers choose to supply one over another with given FoP
how do movements along the supply curve occur
when price changes
.extension = increase in price
.contraction = decrease in price
how do shifts in the supply curve occur
any non-price factors
factors that shift the supply curve
cost of FoP
technology
price of joint supplied products
price of competitively supplied products
tax
subsides
what is consumer surplus
difference between the price that consumers are willing to and able to pay and the market price
what is producer surplus
difference between the price at which suppliers are able and willing to supply at and the market price
consumer and producer surplus on a D and S graph
.consumer surplus is the zone above the price/equilibrium and below the D curve
.producer surplus is the zone below the price/equilibrium and above the S curve
evaluation of the impact of a change in price in consumer surplus
.depends on the elasticity of demand(PED)
.if perfectly elastic- CS = 0 = change in price leads to no change in CS
.if perfectly inelastic- CS = infinite
.more inelastic = more effect on CS
evaluation of the impact of a change in price on producer surplus
.depends on the elasticity of supply(PES)
.if perfectly elastic- PS will be 0 = change in price leads to no change in PS
.if perfectly inelastic- PS will be infinite
.more inelastic = more affect that price has on PS
what is market equilibrium
point where S = QD for a product
everything that is produced is consumed
what happens when price is too high (market disequilibrium)
.there is excess supply as producers want to sell for a price that is higher than what consumers are willing and able to afford
.as firms do not want unsold products, they reduce price until excess supply is gone which is the at the market equilibrium
what happens when price is too low (market disequilibrium)
.there is excess demand as consumers demand for the product more than the firms are willing and able to supply for
.producers realise that there is more profit potential by increasing price eventually removing excess demand
excess supply and demand on the graph
supply = zone above equilibrium point and between D and S curves
demand = zone below equilibrium point and between D and S curves
what is ceteris paribus
“other things being equal”
.assumes that everything else remains the same when looking at microeconomic models
evaluation for the impact of price on the D and S of related markets
substitutes-
.depends if the substitutes is strong or weak
e.g. Coke or Pepsi people might choose one over the even if it is more expensive as they like it more
complements-
.depends if the complement is strong or weak
e.g. bread and butter = they are complements but butter has multiple other uses so its demand might decrease a tiny bit
.time frame- if is short term than consumers aren’t likely to change but if it is long term then it is very likely
.size of price change
what is elasticity
responsiveness of a change in one thing to a change in something else
what is the price elasticity of demand
how demands responds to a change in price
CHANGE IN QD%/CHANGE IN P%
always negative due to a negative relationship between price and QD
what different numbers mean in PED
0 = perfectly inelastic
0 to -1 = inelastic
-1 = unit elastic (same response)
-1 to -infinity = elastic
-infinity = perfectly elastic
elastic and inelastic on a D curve
.perfectly inelastic = D curve is vertical
unit elastic = starts steep and gets less steep
.perfectly elastic = D curve is horizontal
y = Price
x = QD
how PED can help firm change their prices
.if PED is inelastic = the firm should increase price as they would get increased revenue
.if PED is elastic = the firm should decreases price as they would get increased revenue
factors that affect PED
.availability of substitutes
.necessity of product
.proportion of income taken by purchasing product
.complementary products
.addiction
.time = more likely to purchase expensive items in the SR
what is the income elasticity of demand(YED)
responsiveness of demand to a change in income
CHANGE QD%/ CHANGE Y%
what different numbers mean in YED
+1 to +infinity = luxury good/ elastic
0 to +1 = normal good/positive inelastic
0 = no relationship e.g. medicine
0 to -1 = inferior inelastic
-1 to -infinity = inferior elastic
inferior = things that are brought when income is low
YED graph
y = income
x = QD
normal good = upwards sloping D
inferior good = downward sloping D
what is cross elasticity of demand(XED)
the responsiveness of demand for one product to a change in another product
CHANGE QD A%/CHANGE P B%
what different numbers mean in XED
+1 to infinity = elastic substitute
0 to +1 = inelastic substitute
0 = no relationship
0 to -1 = inelastic complement
-1 to -infinity = elastic complement
XED graph
y = price of good b
x = QD of good a
substitute = upward sloping D
complement = downward sloping D
what is the price elasticity of demand(PES)
responsiveness of supply to a change in price
CHANGE QS%/CHANGE P
what different numbers mean in PES
0 = perfectly inelastic
0 to 1 = inelastic
1 = unit elastic
1 to infinity = elastic
infinity = perfectly elastic
PES graph
.perfect inelastic = vertical
.perfect elastic = horizontal
usefulness of elasticity calculations
.helps firms understand how consumers respond to a change in price which they can use to decide either to increase or decrease price
.government can gauge the effects of a tax in consumption of a product
.firms and the government can use YED to model how consumers would respond to income changes e.g. recession
.firms can use XED to figure out how a product will respond to the change in price of another product. This helps firms figure out the relationships between their own products or with competitor’s products
.government can use XED to see if a market is competitive and to see if they should intervene to make it more competitive
evaluation on the usefulness of elasticity calculations
the usefulness depends on:
.the reliability of the data (all calculations are estimates) so if the data used isn’t reliable then it could lead to a wrong decision
.the elasticity will be different in the short run compared to the long run
e.g. consumers might still purchase petrol when it’s price goes up in the short term but in the long term consumers might decide to switch to electric cars
.the actions of competitors as elasticity calculations assume ceteris paribus meaning that in reality the other firms might also change their price making the calculations irrelevant
.all elasticity calculations depend on consumer taste and fashion which means that if the product falls out of fashion then the PED doesn’t matter
what is the margin
the current level of consumption or production of a g+s
utility
benefit from consuming a product
what is marginal utility
benefit gained from consuming one more unit of a g+s
what is total utility
total benefit for consuming a product
what is the law of diminishing marginal utility
the more a product is consumed the less marginal utility is gained
margin in the Demand curve
.D is downward sloping due to the diminishing marginal utility
.consumer surplus decreases with more units are consumed
what is market failure
.situation where the free market does not lead optimal allocation of resources
.this could be due to externalities, information failure or public goods
what is an externality
a cost or benefit to a third party that isn’t in the market transaction
what is an externalities of consumption
externalities that are due to under/overconsumption of a product
positive externalities of consumption diagram
y = costs and benefits
x = output
marginal private benefit = the demand for the product without the third party benefit
marginal social benefit = the demand for the product with the third party benefit added
.as the externalities isn’t accounted for in the market the equilibrium is where MPB meets the supply when externalities is added the equilibrium is where MSB meets supply
.difference between MPB and MSB = external benefit
negative externalities of consumption diagram
.y = cost and benefit
x = output
MPB = demand for product when consumers are using their own utility
MSB = demand for product when cost to third party is taken off
.equilibrium starts at MPB = S but as the third party cost is taken off the equilibrium shifts left to where MSB = S
.difference between MPB and MSB = external cost
what is externalities of production
externalities that are caused due to over/underproduction of a product
.as externalities are not accounted for in the market transaction = the equilibrium is of place = resources are not being allocated correctly
positive externalities of production graph
y = cost/benefits
x = output
MPC = supply of products based on the FoP
.MSC = supply of products with the third party benefit removed
.the equilibrium starts at MPC = S until third party benefits are removed where the equilibrium is shifted to where MSC = S
.difference between the MPC and MSC is the external benefit
negative externalities of production graph
.producers make their production decisions based on the FoP = MPC
.the cost to the third party is then added to the MPC forming the MSC curve
.equilibrium starts where MPC = D but once the externality is added the equilibrium shifts to where MSC meets D
.the difference between MPC and MSC is the external cost
what are the types of information failure
asymmetric- when one party has more information than the other
moral hazard- when one party changes their behaviour due to asymmetric information which leads to extra costs for the other party
merit goods- when consumers gain an added benefits which wasn’t intended (normally under consumed)
demerit goods- when consumers gain less benefit than was intended (normally over consumed
information failure graphs
y = price per unit (£)
x = QD and S
.if its a merit good D/S should be shifted to the right as with perfect information the demand/supply for a merit good would increase
.a demerit good would shift D/S to the left as with perfect information the D/S for the product would decrease
evaluation of merit and demerit goods
.they may lead to information failure as they are under/overconsumed
.but the extent of the market failure depends on:
.the nature of the product
.externalities related to the product
.the consumers that are involved
what are the characteristics of a private good
.excludable = only people who purchase it can access it
.rivalrous = consumption from one person prevents the same consumption by someone else
.rejectable
.has marginal cost = producing one more unit creates extra costs for the producer
e.g. a car
what are the characteristics for a public good
.non-excludable
.non-rivalrous
.non-rejectable
.no marginal costs
e.g. police force
what are quasi-public goods
a good that has characteristics of both a public and private good
why can public goods lead to market failure
.they can be consumed by people who aren’t in the transaction and so havent paid for the good (free riders)
e.g. street lights
evaluation of provision of public goods
.one way to solve the market failure is by having the government to provide the public goods
.e.g. the national defence
.if the government hadn’t provided the national defence it would likely underprovided as consumers woudnt want to spend significant amounts of money on the provision
.underprovision would lead to market failure as most public goods are positive externailties or merit goods
this depends on:
.the oppotunity cost of providing the good
.cost of provision
.risk of underprovision
.public perception
.politics
what are the main forms of government intervention
taxtation
subsides
government expenditure
price controls
buffer stock systems
public/private partnerships
legislation
regulation
tradable pollution permits
information provision
competition policy
what is taxation
amount paid to the government
direct- aims to effect D as its paid by the consumer
indirect- aims to effect S as its paid by producer but might be passed on to the consumer via VAT(valued added tax)
taxation graph
y = price
x = quantity
.if an indirect tax is added (e.g. for cigarettes) its shifts the supply curve to the left. this reduces the quantity equilibrium and increases the quantity equilibrium
effectiveness of tax depends on:
.PED (if inelastic then price changes dose little to the quantity demanded)
.XED (if a product can be easily subsituted then a small tax can lead to a big decrease in QD)
what are subsides
amount paid to a business to produce products
.has potential to increase supply
.used for underconsumed/produced products(normally merit goods or positive externailites)
effectiveness depends on:
PED (elastic = big change in QD to small change in P)
XED
what is government expenditure(public spending)
.normally spend via subsidies
main areas of gov spending:
.social protection
.health
.education
.defence
.debt
.social services
.housing/environment
.transport
.industry, agriculture and employment
what are price controls
.comes as price ceiling and price floor (maximum and minimum price)
.they create an excess supply or excess demand
.minimum price lead to an excess in supply and so dropping QD from where MP meets S to where MP meets D
what are buffer stock systems
.system of holding and releasing stock to maintain market price despite supply fluctuations
.aims to even out fluctuations by storing products when there is a good year and using the stored goods when the year is bad
.government can set price floor and ceiling (range of acceptable prices)
.if S falls so that P is higher than price ceiling then stock can be increased by using the buffer stock bring S back into the range
what does the effectiveness of buffer stock systems depend on
.the product must be able to be stored for a long period of time
e.g. some agricultural goods can only be stored for a short period of time
.if the price floor and ceiling isn’t set properly than it can lead to excess supply and demand
.cost of storage can lead to inefficiency
what are public/private partnerships
partnership between government and a producer in order to increase S
.helps involve private businesses in the provision of public goods
e.g. NHS provision of healthcare is limited by gov spending which can lead to long waiting lists and so excess demand
.but if some elements of healthcare provision are able to act as private goods e.g. physiotherapy then the government can focus on spending in the true public goods e.g. emergency care
what is legislation
laws that gov put in place to govern the production and consumption of products
e.g. production and consumption of certain drugs have been governed to reduce the negative externalities of theft, anti-social behaviour and demerit effects like mental and physical effects
.it eliminates the legal market for the g+s meaning there is not legitimate demand/supply
.legislation can also restrict the supply or demand
e.g. you need to be licensed to sell alcohol and you need to be over 18 to purchase alcohol
what is the effectiveness of legislation dependent on
.punishment for breaking the law
.chance of being caught
.costs of enforcement
what is regulation
rules that apply to a specific industry or market that govern the production or consumption of a product
what are tradable pollution permits
system that forces producers to include the cost of pollution in their production decisions
.more pollution = more permits needed = increased cost of production
.less pollution = able to sell permits = decreased cost of production
what is the effectiveness of tradeable pollution permits dependent on
price of pollution permits
pollution will continue
how competitive the market is
what is information provision
act of informing the the public about the true nature of a product
.e.g. showing the dangers of smoking
.it is used on products that are either under or over consumed
what is competition policy
legislation and regulation that aims to make a market more competitive
.in the UK the CMA regulates the competition policy
.the CMA target:
collusive behaviour- firms who agree to set a high price to gain supernormal profit
abuse of market power- dominant firms that use their power to gain an unfair advantage
e.g. purchasing all 5G licences in the UK mobile market
what is government failure
when government intervention does not reduce market failure and may even increase it or introduce new failures
e.g.
.information provision that doesn’t lead to a change in behaviour
.taxation that doesn’t disincentives people
.gov spending that does not lead to an increase in supply
how can estimating the extent of market failure lead to gov failure
.the government has to use market research to determine to estimate the effect of the intervention
.if the intervention is too high or low it can lead to gov failure
e.g. if the tax on alcohol is too high then the market will be ruined but if it is too low then the supply might not change significantly
how can the cost of intervention lead to gov failure
if the cost of intervention is higher than the benefit then it isn’t worth
how can political agendas lead to gov failure
as government is a political body, some intervention is motivated by political benefits instead of reducing market failure
e.g. normally interventions that do not have an effect on the short term will be ignored (investment in nuclear power) as a government may be in power for a short period of time and so wont gain any benefits
how can a lack of profit incentive lead to gov failure
.the interventions used might remove the profit incentive for firms in the market
e.g. NHS lacks the incentive to reduce costs as they lack the profit incentive
how can moral hazard lead to gov failure
.firms that know that the government is willing to protect the market might make risker decisions
e.g. banks might know that they would get bailed out if there is a downturn in the market so they make unreasonable risks lead to bigger market failure
consequences of government failure
.intervention may not have any effect on supply and demand = market failure continues
.intervention may have costs that lead to oppo cost of the government not being able to spend on other projects e.g. education and healthcare
.it could lead to firms leaving the market = unemployment or loss of industry
.can disincentives firms from increasing production to a more efficient point
