TOPIC 3 ECO (chapter 6-8) Flashcards
demand
quantity of particular g/s consumers willing & able to purchase at various price levels at point in time
market demand
demand by ALL CONSUMERS for particular g/s
6 factors affecting market demand (similar to factors for individual demand) (i think the info is the same actually)
- price of g/s itself
- price of other g&s
- expected future prices
- changes in consumer tastes & preferences
- level of income
- size of population & age distribution
income distribution
way economy’s income spread among members of different social & socio-economic groups
network externality
behaviour of other consumers influence individual’s decision to demand g/s, affecting no. ppl purchasing the good
POSITIVE network externality (BANDWAGON EFFECT)
ppl demand good cause everyone else has one
NEGATIVE network externality (SNOB EFFECT)
demand for good is HIGHER when FEWER people own it (sports cars)
bandwagon vs snob
ceteris paribus
assumption to isolate relationship between 2 eco variables
‘other things being equal’ assuming all other factors affecting (demand) remain constant
+ 2 reasons why law of demand
quantity demanded by consumers falls as price rises
-price reduced, consumers buy more of product because 1. can afford to buy more of it 2. product cheaper compared with other g&s
hence, more ppl willing & able to buy good at lower price
what does demand curve look like
linear line with negative gradient (slopes downwards from left to right)
quantity demanded x-axis
price y-axis
result of PRICE CHANGES results in what movement of the demand curve?
ALONG (change positions WITHIN curve)
EXPANSIONS and CONTRACTIONS in demand
contraction: INCREASE price DECREASE quantity, UPWARD movement
change in other factors of demand, NOT price will lead to what movement in the demand curve?
SHIFT in demand curve
INCREASES and DECREASES in demand
shift RIGHT: INCREASE in demand
-consumers WILLING and ABLE to buy more of the product at EACH POSSIBLE PRICE than before
price elasticity of demand
measures responsiveness of quantity demanded to change in price
calculated as % change in QUANTITY demanded/% change in PRICE
ELASTIC demand
STRONG response to change in price
UNIT ELASTIC demand
PROPORTIONAL response to price change
total amount spent by consumers remain UNCHANGED
INELASTIC demand
WEAK response to price change
why is knowledge of price elasticity of demand important for business firms?
need understand PED for goods they sell to decide on OPTIMAL PRICING strategy
-demand relatively ELASTIC, lowering price GREATLY expand volume of sales –> ^total revenue
-demand relatively INELASTIC, firm increase price –> ^total revenue (reduction in sales < price increase)
why does the GVT need to know the PED?
-needs to understand PED when pricing g&s provides for community (eg. public transport fares)
need to predict effects of changes in indirect taxes (sales taxes, excise duties, special levies) imposes on goods eg. alcohol, tobacco and petrol
-taxes raises price of goods gauge responsiveness of demand to accurately estimate emount of revenue they’ll raise
-bc excise tax –> reduced sales, GVTS raise lower-than-expected amt revenue when imposing excise tax on good with HIGHER price ELASTICITY
total outlay method
direction
calcuate PED by observing effect of changes in price on REVENUE earned by producer
-price & revenue move SAME DIRECTION, demand INELASTIC
-OPP direction is ELASTIC
-revenue unchanged with price change, UNIT ELASTIC
how is total outlay (total expenditure by consumers) calculated
price x quantity
price ^ revenue ^ = ?
inelastic
price ^ revenue v = ?
elastic
price ^ revenue - = ?
unit elastic
perfectly in/elastic demand are the only 2 extreme circumstances where looking at the slop of the demand curve is _____ to determine the PED through the ENTIRE curve
SUFFICIENT, suitable
what does PERFECTLY ELASTIC demand look like on the demand curve? why?
pure comp
HORIZONTAL straight line ———–,
consumers demand unlimited quantity at certain price, but nothing at price above
ONLY THEORETICAL, this will never exist, although for INDIVIDUAL SELLERS, under certain circumstances in a perfectly competitive market (many buyers & sellers selling product basically same & can charge higher price since they’d lose all customers to others selling identical products)
PERFECTLY INELASTIC demand
consumers willing to pay ANY price to obtain given quantity of g/s (eg. life-threatening curing medication)
VERTICAL demand curve
price elasticity of demand for any good affected by 5 factors NSPTA
PANTS
- whether good is LUXURY or NECESSITY
- whether good has close SUBSTITUTES
- EXPENDITURE on product as PROPORTION of income
- LENGTH of time subsequent to PRICE CHANGE
- whether good is ADDICTIVE or not
how does the good being luxury/necessity affect PED?
necessities relatively INELASTIC demand (increase in price, quantity demanded wont fall much)
luxuries, PED expected to be higher
how does whether the good has any close substitutes affect PED?
eg. diff brands of breakfast cereal have HIGHLY ELASTIC demand (ppl switch to another brand perceived as equally good if price rises)
eg. few/no subs INELASTIC demand (cannot switch)
how does expenditure on the product as a proportion of income affect PED?
g&s take very small prop of income LOWER PED
demand for expensive items more ELASTIC (eg. 10% rise for gum < 10% for new car)
how does the length of time subsequent to a price change affect PED?
price of product ^, quantity demanded may not initially respond greatly
-consumers take time to become aware & adjust
-take time to seek alternatives & identify substitute products –> demand more responsive
also depend on whether good is DURABLE or not.
-after price changes, durable goods have more ELASTIC demand than non
-eg. rise price of new cars encourage repair than replace, –> demand HIGHLY ELASTIC –> over time decline elasticity (replace at some point)
how does whether a good is addictive affect PED?
cigarettes & alcohol relatively INELASTIC demand
supply
quantity of g/s all firms in particular industry willing & able to offer for sale at diff price levels at point in time
market supply
sum of individual firm supplies of individual producers at various price levels
itself other
main factors affecting market supply (same as inc/dec supply)
- price of g/s itself
- price of other g&s
- state of tech
- changes in cost of FOD
- quantity of good available
- climatic and seasonal infleunce
how does price of g/s itself affect market supply
future expectations
too low, some producers unable to cover costs of production & wont supply item
FUTURE PRICE EXPECTATIONS of g/s also influences
-supplier believes price ^ future, supply of g/s increase
-possibility of increased profits arising from supply of good
how does price of other g/s affect market supply?
quantity affected
-price of X same, price of Y ^, more profitable to produce Y
-firms less willing to supply X & more willing to produce & supply Y
hwo does state of technology affect market supply?
tech improvements lower production costs & allow firms to supply more goods at given price
allow firms to adjust production runs to quickly accommodate changing demand
-automated production-lines in vehicle industry greatly reduces production costs, ^ supply
how do changes in cost of FOP affect market supply?
fall –> rise
fall in cost of FOP allow firms supply more of good, rise more diff to maintain present supply, reliant on factor input
how does quantity of goods available affect supply?
overall limiting factor
many industries, NO. SUPPLIERS affects quantity of g/s available
-more suppliers enter industry, supply ^
how does climatic & seasonal influence affect supply?
agricultural production
law of supply
2 reasons
as price of certain product rises, quantity supplied by producers rise because:
1. firms already in industry, producing good more profitable –> increase production of good
2. higher price makes producing it more profitable for other businesses –> attract new firms to industry –> increase quantity supplied
what does the supply curve look like
x-axis quantity supplied
y-axis price
slopes UPWARDS from left to right
what does contraction & expansion look on supply/demand curve
movement ALONG curve due to PRICE CHANGE
what does increase in supply mean?
shift right, firms willing & able to supply more of product at each price level than before
what does a decrease in supply mean?
shift curve left, firms ONLY willing & able to supply GIVEN quantity at HIGHER price than before
5 factors causing INCREASE in supply FTFQC
- FALL in price of OTHER goods
-production of other goods less profitable - TECH improvement in PRODUCTION process
- FALL in COST of FOP
- INCREASE QUANTITY RESOURCES available for production
- CLIMATIC conditions/seasonal changes more FAVOURABLE to production process
OTFQRC
factors causning DECREASE in supply (same but include regulations)
- RISE price OTHER goods
- TECH NO longer AVAILABLE (highly unlikely)
- RISE cost of FOP
- DECREASE QUANTITY resources available
- REGULATIONS for health&safety (covid social distancing)
- CLIMATIC conditions/seasonal changes LESS favourable to producing certain good
RELATIVELY ELASTIC supply, relatively INELASTIC, UNIT elastic
RISE in QUANTITY supplied proportionately GREATER than INCREASE in PRICE
less-than proportionate change in quantity supplied
quantity supplied rises same proportion as price increase
3 factors affecting elasticity of supply
TSE
- TIME LAGS after price change
- ability to hold & store STOCK
- EXCESS capacity
how do time lags after price changes affect elasticity of supply?
greater amt time producers have to respond to price change, more ELASTIC supply for product
-price ^, producers restricted attempt to increase production in short run
-immediately after price change, supply of most products virtually perfectly inelastic (producers cannot increase any inputs, only try increase production w/ existing workers & equip by working harder)
-short run vary some inputs to production process (no. employed workers, quantity of raw materials) to respond more readily
SHORT run
PES ^, still relatively inelastic
LONG run
producers increase inputs & facilitate greater increase in production responding to price change, supply relatively price ELASTIC
Inventory
total stock of g&s held by firm at point in time (PIT) intended for sale to consumers
how does the ability to hold & store stock affect elasticity of supply?
possible to store goods & not offer for sale during DOWNTURN in market conditions & falling prices (inventory)
& offer sale when prices rise again
-ability to hold stock affects ease producers can respond to price changes,more elastic the supply
-also depends on nature of good (highly perishable eg. fresh veg diff to hold in stock, supply relatively inelastic) but durable goods eg furniture easier to store, more elastic supply
how does excess capacity affect elasticity of supply?
when firm not using existing resources to full capacity
-elastic when firms have excess, can respond quick to price increase by using existing resources more extensively
-only operate at half capacity can double output very quickly in resposne to price increase
-resources already full capacity, supply** inelastic**
pure competition/perfect competition
no participant in market has power to influence market outcomes directly (eg. setting prices)
no firm has MARKET POWER to raise prices above competitive equilibrium (wont exist, come close with soem industries eg. fresh food)
market equilibrium
at certain price, quantity suppleid & quantity demanded of commodity equal
-market clears (no excess supply/demand)
-no tendency for change in price/quantity
what does the price mechanism ‘diagram’ look like
market demand + market supply –> price mechanism –> equilibrium price + equilibrium quantity
market equilibrium happens when 3 things occur:
- quantity demanded = quantity supplied
- market clears
- no tendency to change
how does the equilibrium price & quantity change
shift in either or both supply & demand curves
conditions behind supply and demand, NOT change in PRICE
increase in ____ raises both equilibrium PRICE and equilibrium QUANTITY
demand
increase in supply lowers equilibrium ___ and raises ewquilibrium ____
price, quantity
decrease in supply ___ equilibrium price aaaand ____ equilibrium quantity
raises, lowers
product market
interaction of demand for & supply of outputs of production (g&s)
the price mechanbism attempts to solve the eco problem in ____ ____ for g&s
product markets
demand curve: wants of individuals in economy
supply curve: production of firms with limited resources
factor market
market for any input into production process (FOP)
allocative efficiency
eco’s ability to allocate resources to satisfy consumer wants
how does price mechanism play central role in factor markets
demand & supply in factor markets determine price paid for FOP –> share of total output received by individuals who possess resources (inc skills)/produce g&s that are scarce/high in demand (command higher incomes & greater prop of total output)
how does the market mechanism ensure allocative efficiency in eco?
ensures equilibrium reached at intersection of demadn & supply curves
-production continues to increase until point where value to consumers of last good produced = cost to producers
why is the price mechanism efficient?
- any consumer willing to pay market price for g/s satisfied
- any producer offering g/s at market price can sell all they produce
competition among producers also ensures they’re responsive to consumer demand & they’ll attempt to minimise costs of production to remain competitive in market & maintain profitability, ensuring most cost-efficient methods of production used
market failure
when price mechanism accounts private benefits & costs of production to consumers & producers but fails to account indirect costs eg. damage environment
why does gvt intervene in the market place?
market price for g&s in product markets can be too high/low
equilibrium quantity resulting from free interplay of demand & supply also may be too high/low
price ceilings & price floors
max/min price can be charged for commodities
why does gvt use price intervention in marketplace?
redistribute income
-may feel market determined price for some commodities (eg. trnasport) too high or items (eg. unskilled labour) too low
-price CEILINGS redistribute money FROM SELLERS to buyers
-price FLOORS redistrivute money FROM BUYERS to sellers
why would the gvt impose quantity intervention in the marketplace?
quantity of some g&s market provides too high/low bc individual bus firms & consumers often dont consider SOCIAL costs/benefits of production MARKET FAILURE & consumption of some g&s
-externalities not considered in operation of price mechanism
externalities & negative externalities
social costs & benefits
not considering social costs of production process
how does the gvt act in quantity intervention in the marketplace?
articifically restrict production levels through laws (issuing safety regulations/pollution emission permits)
impose TAXES on businesses
-increase production costs & reduce production lvls
internalising the externality
making individual business pay for social costs
merit goods
goods not produced in sufficient quantity by private sector bc they dont place sufficient value on those goods
-involve positive externalities not fully enjoyed by consumer
(eg. edu, healthcare)
public goods
goods private firms UNWILLING to SUPPLY, unable to restrict usage & benefits to those willing to pay for good
-gvts prodive these
if market price too high, what does GVT do and what is the outcome?
price ceiling –> reduces price, quantity shortage (disequilibrium)
if market price too low, what does the GVT do and what is the outcome?
price floor –> increases price quantity excess (disequilibrium)
if market QUANTITY is too HIGH (NEGATIVE externalities), what does the gvt do and what is the outcome?
impose taxes –> increases equilibrium price, reduces equilibrium quantiy
(increase price, reduce quantity)
if market quantity too LOW, (POSITIVE externalities) what does GVT do and hwati s the outcome
subsidies –> reduced equilibrium price, increases equilibrium quantity
(reduce price, increase quantity)
iif the market doesnt provide public goods, what odes the GVT do and what is the outcome
gvt provides public good (eg. police, defence) –> gvt collects taxation revenue to finance its supply of public goods
firms enjoy some degree of market power in most industries, which results in
higher equilibrium price/lower equilibrium quantity than equilibrium price & quantity lvls resulting in PURE competition
(higher price/lower quantity)
4 things
market structure
-no. & relative size of firms within an industry
-nature of product being sold
-ease which new firms can enter into industry
primarily determines degree of competition in industry
monopolistic competition
many small firms in the industry
oligopoly
small no. of large firms that dominate the industry
monopoly (opp of pure comp)
only 1 producer in the industry
4 main market structures
- pure competition
- monopolistic competition
- oligopoly
- monopoly
wht 5 market conditions do firms operating under pure competition face?
HMBS
- many small buyers and none large enough to affect market price
- products sold by all firms HOMOGENOUS (sell same product)
-buyers & sellers know product is same & prices offered for sale throughout market - BUYERS dont incur any cost for MOVING from one SUPPLIER to another
- NO BARRIERS to new firms ENTERING/existing firms LEAVING market
- sellers can SELL as much of their product as desired at market price
what are firms/what do they face under pure competition?
firms are PRICE TAKERS, must accept market price determined by forces of supply & demand
-try to sell above, no one buys bc buyers can get same at lower market price
-cannot sell below market price, not profit-maximising
what 3 conditions are a monopoly characterised by
- only 1 firm selling product, no market comp at all
- product sold has no close substitutes
- extremely high barriers to entry, prevents potential competitors from entering market
what is the monopolist power under a monopoly?
price setter to maximise profit, dont wrory about winning customers away from competitors (eg. AUS water supply)
if product produced by monopolist than under pure competition, monopolist restricts output & raises price
-as lvl comp in market ^, prices fall & outut ^
what are the 2 market structures of IMPERFECT competition and why
monopolistic comp & oligopoly
both have 1+ firm competing in market, and dont face conditions of pure ocmp
what 4 conditions are monopolistic competition characterised by?
- large no. small firms
- similar (not identical) products sold in market
-firms engage in PRODUCT DIFFERENTIATION - differentiated products –> some degree of price-setting power
- small barriers for new firms entering market
-existing firms have loyal customers thru product differentiation, consider their firm supplied best products (BRAND LOYALTY)
product differentiation
firms make g/s look diff from competitors (packaging, product image) to increase BRAND LOYALTY and give firm some degree of PRICE-SETTING POWER
how do firms under monopolistic competition adjust to fierce competition?
many close substitutes for product, advertising attracts new custoemrs & maintains existing ones
eg. restaurants
oligopoly (most common market structure in Australia’s large industries) 3 characteristic
- only few large firms, each has sig share of market
- sell similar but differentiated products
- sig barriers to entry (only few firms in industry)
what odes an oligopolist firm do
constantly monitors behaviour of rival firms in industry
-must carefully consider reactions of competitors whenever changes pricing/output policies
-compete through advertising campaigns promoting products than price cutting (avoid price cutting war causing profits drop dramaticallyfor all firms in industry)
eg. supermarkets dominated by woolworths & coles
airlines dominated by qantas & virgin australia
