Topic 1: Dynamics of markets: relationship between markets

Question 1

Relative prices

Answer 1

The prices that you see on goods and those that are quoted for services are nominal prices. The price of one good expressed in terms of another is a relative price

Question 2

examples of how we make use of relief prices in everyday life
(Alternatives)

Answer 2

Alternatives: When people buy a good or a service they will compare the price of that good or service with that of another good or service Fore example, when you buy a cold drink, you will compare the price with that of ice cam cone. If the cold drink is R15 and the price of the cone is R5 the relative price of the cold drink is three times

Question 3

examples of how we make use of relief prices in everyday life
(Indexes)

Answer 3

Your mother compares the price of many of the good that she buys every month with the prices of goods that she does not buy. It is often difficult to keep track of the prices of all the goods that can be regarded as alternatives for the things we buy with our incomes. We therefore make use of a price index such as consumer price index in SA. The index becomes the common yardstick tat we measure prices against

Question 4

examples of how we make use of relief prices in everyday life
(Percentages)

Answer 4

We ignore the nominal prices and compare only the percentages by which the prices change like if the price of cold drinks increase by 5% and that of ice cram increases by 3% then the relative price of cld drinks has increased by 2%

Question 5

Demand relationships

(substitutes) Law

Answer 5

first law of demand states that, all things being the same, an inverse relationship exists between the price of a good and the quantity demanded of that good. This law suggests the existence of substitutes for the good in question meaning if the price of a good increases, it implies that more of another good must be sacrificed in order to maintain the same level of consumption

Question 6

What is the Demand and relationships

Answer 6

The demand curve is a downward sloping curve showing the relationship between the prices of a good and the corresponding quantities of the good demanded over a period of time

Question 7

Substitutes of demand

Answer 7

The first law of demand states that all things being the same, an inverse relationship exists between the price of good and the quantity demanded of that good. This law suggests the existence of substitutes for the good in question. If the price of a good increases, it implies that more of another god must be sacrificed in order to maintain the same level of consumption
For example the price of coffee increases due to a decrease in supply caused by poor harvest, the price of tea may increase because of bigger demand

Question 8

Complements of demand

Answer 8

With complementary goods, a change in. The price of one of them will cause a change in the demand for another for example, a change in the production cost of tea due to technological progress will make tea available at lower prices

Question 9

Supply relationships

Answer 9

The law of supply states that there is a direct relationship between the price of a good and the supply of that good. When the price of a good increase the quantity supplied is likely to increase. The supply curve is therefore upward sloping from left to right

In the production process, enterprises have to choose which goods to produce and in what quantities to produce them. Relative prices convey information to guide the enterprises’ choices in this regard. As resources are limited, any increase in the production of one good like milk implies a decrease in the production of another like butter

Question 10

Substitutes of supply

Answer 10

many goods compete for the same resources and are competitively supplied. For example, if VW M wants to produce more polos because the demand for vehicles has increased and it thus becomes more profitable to produce polos, the production of passats may have to be curtailed. These good compete for the same resources and in order to produce more of the one, the production of the substitute good has to be decreased.

Question 11

Complements of the supply

Answer 11

In the production of certain ggods, it often happens that more of another good is also produced. For example, in the production of geese for the meat market, featbthers will be supplied at the same time. these goods are jointly supplied. oil refineries produce many different fuels from crude oil and an increase in the production of petrol, will automatically increase the output of diiesel. Where goods are jointly supplied an increase in the deman for one will increase the supply of another, causing its price to decline

Question 12

Changes in the goods market

Answer 12

Changes in the factor market will, in turn, affect the good market. If the wage of artisans increases at VW, the cost of producing cars at VW increases and will probably raise the price of VW cars. In the car retail market, consumers may switch their demand to Toyota cars, where prices have not increased

Question 13

Market structure: perfect and imperfect markets

Answer 13

market structure describes the different levels and forms of competition. markets can be divided into four basic categories, based on the degree of competition that prevails within each, that is, on how hard participants attempt to outdo and avoid being outdone by their rivals. the most competitive of the four markets structure is the perfect market and the least competitive is the monopoly market. In between lie two more market structures namely monopolistic competition and oligopolies

Question 14

Four basic market structure models

Answer 14

Market structure describes different levels and forms of competition. A model is a simplified representation of reality.

Question 15

Common features of market structure models

Derivatives

Answer 15

To create market structure models that are comparable we need to construct them using derivatives. We are forced to do this because a monopoly does not have a supply curve. A supply curve tells us the quantity that businesses choose to supply at any given price. But a monopoly business is a price maker. It is merely one spot. However, if we work with the derivatives we can work with curves and because of that learn about the dynamics of the different models

Question 16

Common features of market structure models

Number of businesses

Answer 16

To be comparative the models in this section focus on single producers

Question 17

Common features of market structure models

Profit

Answer 17

The business that pursues maximum accounting profits will produce at any level where total revenue exceeds total cost (profit =TR-TC). In economics we use two kinds of profit.they are economic and normal profit. Normal profit is a cost item because it is the remuneration of the entrepreneur. Remunerations of all the service of factors of production are part of businesses costs. Economic profit is a surplus to cost. Sometimes it is called abnormal profits

Question 18

The four markets

Monopolistic competition

Answer 18

Monopolistic competition describes a market composed of a number of producers whose goods are not homogeneous. It contains elements of both perfectly competitive markets and monopoly markets. But, most of the businesses can be regarded as competing monopolists. Because of the existence of close substitutes, customers can turn to other producers if a monopolistically competitive business raises its price but in many instances, they succeed in building up brand loyalty. Therefore price increases must be significant before customers will start buying another brand

The monopolistic competitor charges the maximum price buyers will tolerate. Because the demand curve slopes downward, the marginal revenue curve lies below it

The monopolistic competitor earns zero economic profit in the long run. When businesses are making economic profit, new businesses have an incentive to enter the market. This entry increases the number of products from which consumers can choose and therefore reduces the demand faces by each business already in the market. This causes the demand curves faced by the businesses already in the market to move to the left. In the long run, there can be no economic profit because entry into the market is not restrictive. If there are any profits, others will enter the industry, positioning them into to takeaway customers from the profitable sellers
The model of monopolistic competition is the most common market structure. Both the single sellers of monopoly markets and the many sellers of price- taking competition are uncommon by comparison

Question 19

Perfect markets

Answer 19

Known as free markets, retail when there is unhampered competition in markets

Question 20

Perfect market assumptions

Answer 20

1. There are many producers in the market, none of which is large enough to affect the going market price for the good. All producers are price takers
2. Producers sell homogeneous goods, meaning that the good of one producer is indistinguishable from that of another
3. There many consumers in the market, none of whom are powerful enough to affect the market price of the good. As producers, consumers are price takers
4. Producers enjoy complete freedom of entry into and exit from the market, that is entry and exit cost are minimal, although not completely absent
5. Consumers are fully knowledgeable about the prices charged by different producers and are totally indifferent as to which producer they buy from

Question 21

Impurities in perfect markets

Answer 21

1. The number of producers is not numerous. For example in SA, the private hospital market is dominated by two big businesses
2. Goods sold by all producers are not completely identical. Agricultural goods are often graded to create homogeneities like meat, wool and fruits
3. There are costs involved in moving into and out of markets. Licences to sell food, permits to sell medicine are some examples

Question 22

What are imperfect markets?

Answer 22

Imperfect markets prevail when there is imperfect competition among producers

Question 23

3 types of imperfect markets

Answer 23

monopolies
oligopolies
monopolistic competition

Question 24

monopoly?

Answer 24

Pure monopoly is the least competitive of the four market structures. Monopoly is the opposite extreme to perfect competition in the spectrum of market structure

Question 25

What is the monopoly?

Answer 25

is a single seller in a market where a substitute is not available, entry by other producers is completely blocked and it has complete information about the market

Question 26

How do monopolies come into existence?

Answer 26

Barriers like Natural barriers: including the uneven distribution of natural resources. The fact that oil is concentrated in certain countries assists in the creation of oil monopolies
Cost barriers: Economies of scale might be so important in some industries that in order to compete, a company must be large. Smaller businesses find it difficult to compete. An example is an electricity supplier
Legal barriers:

Question 27

How do monopolies come into existence?

Answer 27

Barriers like Natural barriers: including the uneven distribution of natural resources. The fact that oil is concentrated in certain countries assists in the creation of oil monopolies
Cost barriers: Economies of scale might be so important in some industries that in order to compete, a company must be large. Smaller businesses find it difficult to compete. An example is an electricity supplier
Legal barriers: Some monopolies are protected by law. A national government might argue that this is in the public interest like
- the mail service monopoly ensures that a single price stamp will guarantee delivery to address anywhere in the country. The monopoly enables cheap local deliveries to cross-subsidies loss making deliveries to remote places
- The fact that dentist, doctors, lawyers, and teachers have to belong to a professional body creates a type of monopoly but ensures that standards are maintained
- patents, copyright, intellectual property: if new ideas could simply be pirated, there would be no incentive to be creative. Why be the first to write a piece of music, a book, or a computer program or the first to invent the machine or the new machine if others can use your idea without payment
- International distances can be a barrier and sometimes trade barriers such as tariffs and quotas have the effect of protecting monopolies

Question 28

What is monopolistic competition?

Answer 28

is the market composed of a number of producers whose goods are not homogenous. It contains elements of both perfectly competitive markets and monopoly markets.

Question 29

When does a monopolistically competitive market exist

Answer 29

1. There are many competitors some of which may be large
2. Entry into the market is not difficult but is restricted by modest entry costs, mainly overheads and other things like licenses and qualifications
3. product differentiation prevails. Brand names are articulated. Non- price competition is the focus of such things as advertising, good customer services, and service differentiation

Question 30

Why can customers turn to other producers if a monopolistically competitive business raises its price?

Answer 30

Because of the existence of close substitutes

Question 31

What is oligopoly

Answer 31

is a market composed of only a smaller number of dominant producers whose pricing decisions are interdependent.

Question 32

Oligopoly characteristics

Answer 32

1. Barriers: Generally the barriers to entry into the markets are considerable
2. Collusions. In order to reduce the strain of uncertainty, businesses might do secret price, quality, and market deals with each other to reduce competition. hence the laws to promote competition and prevent collisions
3. Pricing. Their pricing decisions are interdependent. That is, the pricing decisions of anyone business can substantially affect the sale of others. Therefore, each business must monitor and respond to the pricing and production decisions of the other enterprises in the industry
4. Kind of goods. Oligopolies may produce either identical goods or highly differentiated goods. Generally, the barriers to entry into the market are considerable

Question 33

Perfect competition types of goods

Answer 33

Wheat and milk

Question 34

Monopolistic competition

Answer 34

Motorcars and Movies

Question 35

Oligopoly types of goods

Answer 35

Steel and Cement

Question 36

Monopoly types of goods

Answer 36

Telecom and Electricity