topic 3: markets Flashcards
what is ceteris paribus
The ceteris paribus assumption supposes that all variables affecting economic decisions are independent of one another
How are market prices determined?
2018 Atomi Question
A
(Choice A)
By the forces of supply and demand
B
(Choice B)
By a central planning authority
C
(Choice C)
All businesses charge whatever they like
D
(Choice D)
Consumers pay what they feel like paying
a
Complete the sentence:
The ceteris paribus assumption supposes that all variables affecting economic decisions…
2018 Atomi Question
A
(Choice A)
are intertwined and influence one another.
B
(Choice B)
are independent of one another.
C
(Choice C)
may only be intertwined in specific circumstances.
D
(Choice D)
must be considered at once.
b
Why do economists use the ceteris paribus assumption when forming and analysing models?
2018 Atomi Question
A
(Choice A)
To make models easier to draw
B
(Choice B)
Data is not available for other variables
C
(Choice C)
To make their jobs easier
D
(Choice D)
To clearly understand the relationship between two variables
d
what is demand
the quantity of a particular good or service that consumers will purchase at various prices at a given time
what is market demand
demand by all consumers in the economy for a particular good/service
i.e oranges are $1
tom wants 2 jim wants 3 and jane wants 1
the market demand is 2+3+1 = 6 oranges
what is a demand curve
it shows how much market demand there will be at different prices
what are the factors affecting demand
- price of the good or service itself future prices
- the price of other goods
- expected future prices
4.changes in consumer tastes/preferences
5.level of income
6.size of population and age distribution
What is demand?
2018 Atomi Question
A
(Choice A)
The welfare gained from consuming a good or service
B
(Choice B)
The level of happiness one associated with a good or service
C
(Choice C)
The desire to consume goods and services in the economy
D
(Choice D)
The availability of goods and services in the economy
c
what is the law of demand
the inverse relationship between price and quantity
what is a contraction
it occurs when an increase in price, causing the quantity demanded to fall
shown in the demand curve going up
what is a expansion
when the price decreases causing an increase in demand
shown in the demand curve going down
does changes in price cause movement along the curve
yes
what would happen if the demand curve shifts to the right
it would mean there is an increase in demand
what would happen if there a a shift to the left in the demand curve
a shift to would mean there is a decrease in demand
i.e due to weather
what is supply
a firm’s desire to supply goods and services based on market price
how does price affect supply
price determines how many goods a business makes by impacting profitability
how does price affect demand
price determines which goods a consumer spends their limited money on by impacting opportunity cost
what is market supply
the quantity of a good or service that all firms in an industry can offer for sale at various price levels at a particular point in time
what is the supply curve
the supply is similar to the demand curve however it slopes upwards from left to right
what are the 5 factors affecting supply
- cost of factors of production
-any change in the costs of one of the factors of production will change the supply - cost of other goods and services
- changes in the price of other goods the business produces will impact supply - expected future prices
4.number of suppliers
when the amount of individual firms producing increase, so too will market supply
5.changes in technology
-when the state of technology improves, the level of supply will improve too
Why does new technology lead to an increase supply?
2018 Atomi Question
A
(Choice A)
The number of employees increases
B
(Choice B)
The quality of products increases
C
(Choice C)
The costs of production decrease
D
(Choice D)
The variety of products increases
c
what is the law of supply
as the price of a certain product rises, the quantity supplied by producers will also rise
what is a expansion in the supply curve
when there is an increase in the price of i.e shoes causing an expansion in supply, expansion along the curve(upward movement)
what is a contraction in the supply curve
when there is a decrease in the price of i.e shoes causing a contraction in supply(downward movement)
what factors shift supply
cost of inputs, or more firms entering an industry
if there was a movement to the left in a supply curve what does this imply
there has been a decrease in supply
(there are two observations concerning price and quantity)
- a decrease in supply means firms will supply a given quantity of goods at a higher price
this is represented by the vertical distance between the curves, where quantity hasn’t changed but price has
- a decrease in supply means firms will decrease the quantity of goods at a given price level
this is represented by the horizontal distance between the curves, where quantity has changed but price hasn’t
if there was a movement to the right in a supply curve what does this imply
there has been an increase in supply
(there are two observations arising concerning price and quantity)
- an increase in supply in supply means firms are able to increase the amount of i.e shoes supplied to the market at the same price
this is represented by the horizontal distance between the curves, where the price hasn’t changed but the quantity has
- an increase in supply means firms are able to supply a given quantity of goods for a lower price
this is represented by the vertical distance between the curves, where quantity hasn’t changed but price has
showing increases in supply and decreases in price go hand in hand
what is market equilibrium
is where quantity supplied and quantity demanded are the same, represented as the intersection between demand and supply curve
what is price mechanism
the combined forces of supply and demand
what is market failure
market failure refers to how the free market only factors in private costs/benefits but fails to consider social ones
because of prorperty rights which allows someone to own a resource and determine how it is used theres no property rights on the environment there for damage
such as the carbon emissions, overfishing, deforestation
leads to overuse
can also happen with
-overproduction
when a firm produces too much of a harmful good or service
i.e over production of cigarettes –> public health declining –> cancer
-under production
when firms produce too little of a beneficial goods or service
i.e lack of investment into certain areas for research such as environmental conservation
what is the social marginal cost graph SMC
is the graph that includes both private and social costs
what is the tragedy of the commons
the overuse and depletion of common resources
What is the difference between private and social costs and benifits
private costs and benefits
-costs and benefits directly related to the consumer and producer only
i.e firm costs are factors of production and cost of service, private benefit revenue
cost for consumer is the price paid for the good or service and the benefit utility gained(happiness)
social costs and benifits
-costs and benifits for the whole of society
-includes private benifits also include external costs and benifits
private costs + externalities = social costs
whats the use of the price mechanism
to solve basic economic questions such as what/how much to produce
what is the formula for social costs
private costs + externalities = social costs or benefits external to a private(consumer/firm) considerations when buying
i.e. externalities are borne by the entirety of society whereas its the individual that is borne with private costs and benefits
what are externalities
costs or benifits
what are positive externalititys
social benifits > private benifits
i.e musuems (underproduced)
called merits
what are negative externalities
social benifits/costs < private benefits/costs
i.e oil industry (over produced)
what are public goods
businesses won’t produce them
key features
1.non rival (they don’t have rivals)
i.e street lamp
2. no excludable
i.e street lamp
what is quantity intervention
which is the situation where the government intervenes with the market to regulate the quantity produced of a good or service in order to better address the externalities that are ignored by private costs and benifits
what is merit goods
social benefits purchasing attached to the consumption of goods are not considered when purchasing
which provides a broader social merit
i.g museums, libarys
what are public goods
goods that firms won’t produce as they cannot exclude people unwilling to pay
i.e military, highways, parks
what are price ceilings
a maximum price for a good or service is established below the market equilibrium
-aims to help buyers
what is the disadvantage of a price ceiling
it leads to disequilibrium as we have a shortage
what is a price floor
the minimum price that can be charged for wheat
market disequilibrium because quantity supplied > quantity demanded
surplus in the i.e wheat farm, which is not an efficient allocation of resources
what is price elasticity of demand
it measures the responsiveness of the quantity demanded to a change in price
what is inelastic demand
proportionate change in quantity < proportionate change in price
what is elastic demand
when the quantity demanded is relatively responsive to the price change
i.e change in car wash price
proportionate change in quantity > proportionate to the change in price
= elastic demand
what is unit elasticity
proportionate change in quantity = proportionate change in price
(1% change in price causes a 1% change in demand)
pretty rare(pretty much impossible)
why does price elasticity matter to businesses
because businesses need to understand price elasticity to decide on the optimal pricing strategies
i.e paper towel business
decrease price –> increased sales
elastic demand meaning prices are cheaper but demand increases
another example is medicine
increase in price –> small decrease in sales
increased prices = increased revenue
how do businesses determine elasticity
through market research of tastes and preferences
what are inelastic goods
goods people can’t live without
i.e medicine
price increases so does revenue
what are elastic goods
goods people don’t necessarily need
i.e paper towels
as the price increases you can switch to another product
price increases –> revenue decreases
why are government interested in elasticity of demand
so they can tax on tobacco and alcohol
how will tax impact behaviour –> to predict the amount of revenue and plan for the future doing so they can charge the right for the right good
i.e. excise duty for petrol to raise money (petrol is a inelastic good) increased price won’t affect demand much
what is the total outlay method
it looks at the effect of changes in price on the revenue earned by the business
total outlay -= price of good x quantity demanded at the price
what is another term for total outley
revenue
how to determine elasticity
if price and revenue move in the same direction then its price is inelastic
if price and revenue are opposite in movement then its price elastic
if a price increases and the revenue stays the same than it means its unit elastic
how to compare graphs and determine elasticity
if the slope is steeper it means its relatively price inelastic(i.e health services and bread) while if the slope is more flat than its relatively elastic demand (i.e carwash and foxtel)
what is perfectly inelastic demand
consumers will only consume a particular good or service at a particular price
only a horizontal graph
-IF PRICE DEVIATES THAN THERE WILL BE NO DEMAND
I.E apple farmers
what is perfectly inelastic demand
consumers are willing to pay for any price in order to obtain a given quantity
the demand curve is vertical
-no matter how high or low the price the demand stays the same
i.e hypothetically a consumer with a life threatening disease willing to purchase the drug for any amount
what are 4 factors affecting elasticity of demand
NEPT
N-necessities and luxuries
-have relatively inelastic demand
i.e. food and water
E-existence of close substitutes
-close substitutes tend to have highly elastic demand
i.e one brand of one cereal increase(still get the same utility)
P-proportion of income
cheaper items = more inelastic
i.e toothbrushes with an increase of $1
expensive items = more elastic
i.e. car with an increase of $1000
T-the length of time since a price change
-if the price increases, it may take time to identify substitutes
-if the price decreases, it may take time to realise the change
i.e dry cleaning, if prices increases it make time time to find a new place when you are still with the cleaning business its inelastic hwoever if you find a substitute you can change meaning then its elastic demand
what is price elasticity of supply
measures the responsiveness of the quantity supplied to a change in price
when there is a change in the price of a good or service, price elasticity looks at what business choose to do in response
i.e clothing business that specializes on manual labour of clothes, if the price increase it woudn’t be hard to expand
supply is price elastic –> quanitity supplied is strongly affected by the increased price
i.e local boutique hotel
limited amount of rooms and guests(difficult to expand)
supply is price inelastic –> rise in quantity supplied is small compared to increase in price
if quantity supplied rises in proportion to the price increase, supply is unit elastic
what is perfectly elastic supply
(only at one price)
is the situation where producers will supply the good at one price, and the quantity depends on the demand
i.e the price for a computer stays at a certain price however quantity changes from demand
a horizontal line
i.e meat pie costs $2 to make even if its makes a million more, in this economy consumers can buy as many meat pies without the price changing however they can’t offer a lower price as they will lose money
what is perfectly inelastic supply
producers will supply a given quantity, regardless of the price of the market
vertical line
i.e van gogh paintings, there are only 100 paintings, the quantity is fixed –> price changes
quantity is fixed
what are the three factors influencing elasticity of supply
- time lags
-sometimes a changing quantity supplied won’t happen instantly after a price change as it will take a little bit of time before a business can change the output in response
(how long will this take)(faster they change their output = more elastic)
i.e wheat takes months of previous planning because of this even if the price fails, they couldn’t decrease their output fast
time lag is inelastic in the short-term
2.the ability to hold and store stock
-when prices fall, producers rather wait for the price to go up again instead of selling for a lower price(fruit and vegetable unable to hold for long therefore inelastic)(known as perishable goods)
i.e inelastic
phone
-elastic
furniture
- Excess capacity
-if the business has existing infrastructure, labour or capital that isn’t being used and waiting to be utilised than supply will be elastic in response to a price increase because the business does not have to aquire more inpurts for production
time lag and excess capacity
-is about how quaickly a business can decrease or increase output
ability to hold stock
-can the business hold goods already produced
what is pure competition
an infinite number of identical firms consumers can buy from. Hard to raise prices above market equilibrium due to competition
key features
1.
-all products in the same industry are the same
-consumers incur no cost from switching suppliers
2.
-no barriers for new businesses entering the market
-no barriers for existing businesses leaving the market
3.
-businesses can sell as much as they like at the market price
called price takers
i.e agriculture like wheat
what is monopolistic competition
this is a situation where a large number of relatively small firms compete in a market with similar yet non-identical products
i.e. restaurants, tutoring companies
- product differentiation
presenting goods in a unique/different way
i.e shoe market, different types of shoes
2.have a degree of market power over the price because they produce different goods
i.e nike with shoes
3.few barriers for new firms entering market, loyalty limits extending customer base
i.e loyalty to a shoe company
what is oligopoly
much less firm (2-5) and lots of market power
- lots of market power
-large share of the market
i.e apple and microsoft
2.large barriers for entry
-firms are big and invest in logistics/efficiency
- one firm’s influence decisions can influence another
-can ‘collude’ to keep prices high
what is monopoly
one business has almost complete control over the price
- complete control over price and quantity
2.no substitutes
3.significant barriers to entry
i.e water supply, which is hard for a company to set up where another exists leading to profit maximisation
what is market power
the influence a business has on price and quantity
