Theme 1, How Markets Work CC2 Flashcards

1
Q

price mechanism

A

mechanism through which price is determined in a free market sytem

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2
Q

invisible hand

A

Adam Smith

describe thway in which resources are allocated in a market economy to the advantage of everyone

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3
Q

market equilibrium

A

the equilibrium price and quantity is determined by the intersection of the demand and supply curve
QD = QS

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4
Q

excess supply

A

when price is set above the equilibrium price, there will be too much supply in relation to demand
S > D

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5
Q

excess demand

A

when price is set below the equilibrium market price leading to a situation where demand > supply

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6
Q

quantity demanded

A

the quantity of a good or service that consumers are willing and able to buy at a given price

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7
Q

quantity supplied

A

quantity of a good that suppliers are willing and able to sell at a given price

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8
Q

market definition

A

any convenient set of arrangements by which buyers and sellers communicate to exchange goods and services

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9
Q

demand curve

A

a graph showing how much of a good will be demanded by consumers at any given price

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10
Q

law of demand

A

states that there is an inverse relationship between quantity demanded and the price of a good or service, ceteris paribus

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11
Q

extension of demand

A

price fall causes an increase in QD, ceteris paribus

movement down the curve

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12
Q

contraction of demand

A

price rise causes a fall in QD, ceteris paribus

movement up the demand curve

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13
Q

substitutes

A

two goods that can replace eachother
if the price of Good A rises, the QD of Good B will rise
eg Xbox and Playstation

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14
Q

complements

A

two goods that are usually bought together
if the price of Good A rises, QD of Good B will decrease
eg cereal and milk

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15
Q

changes that will shift the demand curve

A
  • changes in real income
  • changes in tastes and fashions
  • substitutes
  • complements
  • advertising and branding
  • changes in size/age distribution of popn.
  • expectations of future prices
  • derived demand
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16
Q

derived demand

A

needed to produce another good

eg if QD rises for cars, QD for steel to make the cars will also rise

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17
Q

relationship between price and quantity demanded

A

inverse, downward sloping

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18
Q

supply curve

A

graph showing the QS by a firm at any given price

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19
Q

total revenue

A

the income gained from selling a product

revenue = price x quantity sold

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20
Q

profit/loss

A

profit/loss = total revenue - total costs

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21
Q

production costs

A

costs which firms must pay to provide a good/service

they can be fixed or variable costs

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22
Q

extension of supply

A

a price rise will cause a movement along the supply curve to the right (rise in QS)

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23
Q

contraction of supply

A

a price fall will cause a movement along the supply curve to the left (fall QS)

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24
Q

relationship between price and quantity supplied

A

positive

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25
factors causing the supply curve to shift
- change in production costs - improvement in production methods - substitutes - goods in joint supply - weather or natural disasters - aims and objectives of producers - expectations of future prices - indirect taxes and subsidies - new firms enter/leave the market - increase in the factors of production eg labour
26
shifting of the supply curve - substitutes
alternatives | if the price of Good A increases, supplies may switch from selling Good B to Good A to make more of a profit
27
shifting of the supply curve - goods in joint supply
a good is in joint supply with another when it is supplied for two different purposes, ofte when one is a by-product of another if price increases for beef, farmers will rear more cattle and will produce more leather
28
composite demand
competitive supply when a good is used for two or more purposes if more of the good is used for one purpose, less of this good is available for the other purpose
29
consumer surplus
difference between the amount a consumer is willing to pay and the amount they actually pay area of under demand curve but above equilibrium price
30
producer surplus
difference between the price producers are willing to supply a good for and the actual market price area above supply curve and below the equilibrium price
31
Price Elasticity of Demand
PED responsiveness of quantity demanded to a change in price % change in QD / % change in price
32
price elastic demand
the % change in price will lead to a greater proportionate change in QD PED > 1
33
price inelastic demand
the % change in price will lead to a smaller proportionate change in QD PED < 1 (between 0 and 1)
34
unitary elastic demand
a % change in price will lead to the same % change in QD | PED = 1
35
perfectly inelastic demand
the % change in price will lead to no change in QD | PED = 0
36
perfectly elastic demand
QD is infinite at a particular price | PED = infinity
37
determinants of price elasticity of demand
- availability of substitutes - necessity or luxury? - proportion of income spent on a good - habit forming goods - brand loyalty - short or long run?
38
relationship between PED and revenue: - if elastic and the price falls then .... - if elastic and the price rises then .... - if inelastic and the price falls then .... - if inelastic and the price rises then ....
- revenue rises - revenue falls - revenue falls - revenue rises
39
if the gradient of the demand curve is relatively steep, what is the PED? if the gradient of the demand curve is relatively shallow, what is the PED?
- inelastic | - elastic
40
where will you find these points on a demand curve: - unit elastic, PED = 1 - perfectly elastic, PED = infinity - perfectly inelastic, PED = 0
- midpoint of the demand curve - where demand curve touches y-axis - where demand curve touches x-axis
41
Price Elasticity of Supply
PES measures the responsiveness of supply to a change in price % change in supply / % change in price
42
price elastic supply
percentage change in supply is greater than the percentage change in the price of the good PES > 1
43
price inelastic supply
percentage change in supply is less than the percentage change in the price of the good PES < 1
44
short run
a period in which at least one factor of production is fixed
45
long run
a period of time in which all factors of production are variable
46
supply is unitary elastic
% change in price will leade to the same % change in QS | PES = 1
47
supply is perfectly inelastic
% change in price will have no impact on supply | PES = 0
48
supply is perfectly elastic
change in price will lead to an infinite amount being supplied PES = infinity
49
factors that influence price elasticity of supply
- level of spare capacity - state of economy - how easily production can be switched to a different product? - level of stock - perishability of goods - can new firms enter market easily? - short run and long run - nature of product (eg agriculture)
50
Income Elasticity of Demand
YED responsiveness of quantity demanded to a change in income % change in demand / % change in income
51
YED > 1
demand is income elastic
52
YED < 1
demand is income inelastic
53
normal good description normal good YED
if income rises, demand rises if income falls, demand falls positive
54
luxury good description luxury good YED
as income rises, consumers spend proportionally more on the good positive and greater than 1
55
inferior good description inferior good YED
if income rises, demand will fall eg mcdonalds, bus journeys negative
56
Cross Elasticity of Demand
XED | measures the responsiveness of demand for one good following the change in the price of another good
57
positive XED
substitutes
58
negative XED
complements
59
XED = 0
no relationship
60
XED > 1
cross elastic
61
XED < 1
cross inelastic