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Economics Year 11 > Topic Three - Markets: Demand and Supply > Flashcards

Topic Three - Markets: Demand and Supply Flashcards

1
Q

What is a market?

A

A market is a situation where buyers and sellers come together for the purpose of exchange. This exchange is typically in the form of exchanging money in return for a good or service. Markets can be both online or physical

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2
Q

What are product/goods and services markets?

A

Product or goods and services market refers to where and how final goods and services are bought and sold. Here, firms supply final output and receive a revenue in return

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3
Q

What are two examples of a product/goods and services market?

A

An example is a market for fruit and vegetables, market for meat and fish.

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4
Q

What are factor markets?

A

Factor markets refers to markets where factors of production are bought and sold (land, labour, capital, enterprise)

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5
Q

What are some examples of factor markets?

A

Some examples include labour markets ( the place where workers and employees interact with each other. In the labour market, employers compete to hire the best, and the workers compete for the best satisfying job.)

capital markets (the part of a financial system concerned with raising capital by dealing in shares, bonds, and other long-term investments. I.e. NASDAQ)

market for raw material, market for management or entrepreneurial services.

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6
Q

What is derived demand?

A

Derived demand arises from the interaction between product and factor markets. It refers to the demand for productive resources which is derived from demand for final goods and services or output

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7
Q

How do factor and product/goods and services markets interact with each other to create derived demand?

A

The product market (selling of final goods and services) sends a message to businesses as to what the consumers want. From there, the factor markets are affected because the factor markets will sell factors of production which is the most relevant to what the consumers want. Thus resulting in derived demand

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8
Q

What is an example of derived demand?

A

Consumer demand for new cars rises, thus the producers will up their demand for productive inputs or resources used to produce new cars

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9
Q

What is the function of factor and product markets?

A

They both interact to determine equilibrium prices prices and quantities of the various goods,
services and resources bought and sold. Equilibrium refers to a market situation in which there is no tendency for change. When demand and supply are in equilibrium there is no tendency for the price
and quantity demanded or supplied to change.

In other words, economic equilibrium is a situation in which economic forces such as supply and demand are balanced

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10
Q

How are markets equilibrating devices?

A

They determine what and how much is produced (according to consumer demand and resources), it also determines how output is produced (determined by resources and technology available) and also to whom final output is distributed (determined by income)

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11
Q

What do markets discriminate against in market economies?

A

Markets discriminate in favour of those people who have the market income to pay for goods, services and resources.

They also discriminate in favour of people who are first in the market being prepared to pay for goods, services and resources.

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12
Q

What are the 5 roles of prices in market economies? Give a brief description of each

A

Prices reflect relative scarcity of goods and services in terms of supply - A higher price will indicate that the goods and services are low in supply, and a low price will indicate that goods and services are relatively high in supply

Prices help to allocate resources - The resources are allocated to the production of the most profitable goods and services

Prices act as rationing devices - In other words, they allow markets to clear. For example, a surplus of goods
in a market will usually lead to a fall in price, to encourage demand and discourage production. Vice versa.

Prices are an equilibrating device - Changes in prices bring about equilibrium between demand and supply if they are in a disequilibrium situation such as a shortage or surplus of goods.

Prices act as incentives - Signals for producers and entrepreneurs to take risks in organising the
factors of production to produce the goods and services demanded by consumers.

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13
Q

What is opportunity cost?

A

Refers to the cost of alternative consumption or production of a good or service forgone

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14
Q

What are relative prices?

A

The price of a commodity such as a good or service in terms of another

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15
Q

How do relative prices reflect opportunity cost, explain it in an example?

A

Take the example of a movie ticket costing three times less than a theatre ticket. Thus, the opportunity cost of purchasing a theatre ticket is three movie tickets whereas the opportunity cost of purchasing a movie ticket is 0.33 theatre tickets. Thus relative prices can reflect opportunity cost

The price differential between movie and
theatre tickets therefore helps to ration theatre tickets relative to movie tickets, and signals to consumers
the relative opportunity cost of consuming these two alternative or substitute services.

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16
Q

What is demand?

A

Demand is the quantity of a commodity that will be bought at a given price in a given period of time.

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17
Q

What is effective demand?

A

Effective demand is the willingness as well as ability to buy a product.

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18
Q

How is effective demand and demand different?

A

Demand is the mere want or desire for a good whereas effective demand is both the desire for a good AND the ability to buy a product.

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19
Q

What is individual demand?

A

Individual demand refers to that of a single buyer or household demanding a certain good or service.

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20
Q

What is market demand?

A

Market demand is the total demand of a certain good or service. It is calculated through adding up all of the individual demands for a product

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21
Q

What are 6 factors which affect the quantity demanded of any product by an individual consumer ?

A

Consumer tastes and preferences

Disposable income

Prices of other goods

Expectations

Technology

Credit

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22
Q

How are consumer tastes and preferences affect the quantity demanded of a product?

A

What consumers think of products will be a big factor in demand because a person themselves determine the demand for a certain product. Tastes will vary from individual to individual. They are affected by fashion, advertising and other psychological perceptions of products

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23
Q

How does disposable income affect quantity demanded of a product?

A

Buyers’ income plays an important part in determining demand . The higher the income, the greater the ability to buy goods and services which can lead to higher demand. It affects how much is bought as well as the demand for WHAT product

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24
Q

How does prices of other goods affect quantity demanded of a product?

A

If a substitute for a certain good is cheaper than the original good, the demand for that substitute good ill be higher than the original good because it is cheaper.

If the prices of a certain good increases, then the demand for a complementary good will be decreased. I.e. if the prices of cars increase, the demand for cars will probably decrease, and because of that the demand for petrol will also decrease

If the prices of unrelated products increase or decrease it will basically have no effect on the quantity demanded.

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25
Q

How do expectations affect quantity demanded of a product?

A

Consumer expectations of the future will affect their buying decisions because if they expect that they will have a worsening economic situation in the future, then they are unlikely to demand much of a product. Also, expectations of price changes, uncertainty of supply can influence consumers to alter demand decisions

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26
Q

How does technology affect the quantity demanded of a product?

A

Technological change affects the level of demand for particular goods. If a new product is seen as being technically superior, its demand can increase at the expense of existing goods

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27
Q

How does credit affect the quantity demanded of a product?

A

The cost and availability of credit affects the demand for items such as houses, motor vehicles and electrical appliances as these items are nearly always bought by borrowing money which is what credit is.

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28
Q

What is the demand schedule?

A

A market demand schedule is a tabulation of the quantity of a good that all consumers in a market will purchase at a given price. The purpose of it is to create a demand curve to help visualise the quantity of a good demanded at a given price

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29
Q

What is the law of demand?

A

Law of Demand states that consumers will demand more at a lower price but ill demand less at a higher price

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30
Q

What is the income effect?

A

Income effect shows that as price falls, a person’s unchanged money income can buy more.

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31
Q

What is the substitution effect?

A

States that at a lower price the good’s substitutes are now in more demand

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32
Q

How do the income and substitution effects interact with each other and what do they reveal?

A

They usually combine to increase quantity demanded at lower prices and decrease quantity demanded at higher prices

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33
Q

What are some exceptions to the law of demand and typical demand schedule?

A

An exception occurs when a good’s appeal lies in its high prices, in this situation, more might be demanded at higher prices than at lower prices

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34
Q

What is the typical demand schedule like?

A

As the price increases, there is less quantity demanded and as the price decreases, there is more quantity demanded GENERALLY.

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35
Q

What is the demand curve?

A

The demand curve is a two dimensional representation of the demand schedule. The graph is drawn with price along vertical axis and quantity demanded on the horizontal axis. The typical demand curve slopes downward from left to right

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36
Q

What is ceteris paribus?

A

with other conditions remaining the same; other things being equal is the official translation

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37
Q

What are extensions and contractions of a demand curve?

A

Extensions and contractions are essentially the movements along an existing demand curve. They are a response to changes in prices of goods and services

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38
Q

What causes an extension/expansion in a demand curve?

A

An extension in demand occurs when demand increases due to a fall in price, thus creating more demand, shifting the point on a demand curve down (closer towards the x-axis).

Movement to the right from a certain ‘market equilibrium’ through the interaction of demand and supply curves

Look at Figure 6.3 on Riley Economics for example

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39
Q

What causes a contraction in a demand curve?

A

A contraction in demand occurs when demand decreases due to an increase in price, thus creating less demand and shifting the point on a demand curve up (towards the y-axis)

Movement to the left from a certain ‘market equilibrium’ through the interaction of demand and supply curves

Look at Figure 6.3 on Riley economics for example

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40
Q

What gradient does a normal demand curve have?

A

The line has a negative gradient and is a straight line

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41
Q

What do changes in other demand determinants (other than price) result in? (what happens to the curve)

A

Gets shifted left or right of the original curve

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42
Q

What does an increase in demand mean and how does it affect the demand curve?

A

An increase in demand means that buyers now have a greater or more intense demand for the good. This results in a shift to the right in the demand curve

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43
Q

What does a decrease in demand mean and how does it affect the demand curve?

A

A decrease in demand means that buyers are now less willing to purchase the good. This results in a shift to the left in the demand curve.

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44
Q

What does a contraction in demand mean and how does it affect the demand curve?

A

A contraction in demand is the result of a price rise. This results in a point (from another point in the middle of the curve) shifting up (towards the y-axis)

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45
Q

What does an expansion in demand mean and how does it affect the demand curve?

A

An expansion in demand is the result of a price fall. This results in a movement down the curve (towards the x-axis)

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46
Q

What are seven different reasons as to why the demand curve may shift to the left or right?

A

Changing consumer tastes and preferences

Buyers income

Price of other goods

Expectations

Technology

Credit

Population factors

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47
Q

How do changing consumer tastes and preferences affect the demand curve?

A

Positive/favourable change in consumer taste for a product twill increase the demand for a product and shift the demand curve to the right. A reason for this may be a successful advertising campaign

On the other hand, a negative attitude to a good will lead to less of the good being demanded, this results in the demand curve shifting to the left. This could occur with last season’s fashions

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48
Q

How do buyers income affect the demand curve?

A

When income rises, there is an increased disposable income which means people can afford to buy more goods. Thus, the demand increases, and shifts the curve to the right.

This is the opposite when income decreases.

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49
Q

How do prices of other goods affect the demand curve? (Complementary, substitute, unrelated)

A

Price of complementary goods: The demand for one good will move in the opposite direction to the price movement of the complement. This is because since they are basically the same good, when one good is demanded more, the other good is not needed and thus the trend mentioned above occurs

Price of substitute goods:

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50
Q

How do expectations affect the demand curve?

A

Consumers’ expectations of the future will affect their buying decisions. Especially if the purchase is considered ‘major’. If a consumer believes that a good’s supply will be uncertain in the future, this may increase demand, however, this can be the opposite if a consumer believes that a good’s supply will remain constant, thus the demand will stay the same.

Poor expectations of the future will make consumers reluctant to spend their money in fear of unemployment

51
Q

How does technology affect the demand curve?

A

Technological superiority of new and innovative goods can increase their demand. There is typically a higher demand for more ‘new’ technological goods as compared to a lower demand for more ‘old’ technological goods.

52
Q

How does access to credit affect the demand curve?

A

If a person has access to a larger amount of credit, they are more likely to purchase more goods because they have more credit available for them. This is the opposite when the person has access too less credit.

53
Q

How do population factors affect the demand curve?

A

The size of a country’s population affects the market demand for all goods as it determines the number of buyers. Another thing is that a community may be leaning towards a certain demographic leading to a business having to capitalise on demand from that certain demographic , i.e. more girls than boys, this means that businesses selling girls clothing will be more profitable than one selling boys clothing

54
Q

What is supply?

A

Supply is the quantity OFFERED for sale at a given price in a certain period of tie. It is not simply the amount of a good existing at a time

55
Q

What are the two things supply rely on?

A

Supply depends on the amount that is physically possible to supply the market with and the willingness of suppliers to offer particular goods for sale

56
Q

What is market supply?

A

Market supply is the addition of the supply from all the firms that offer goods to a market

57
Q

What is the supply schedule?

A

It is a table showing the different quantities that will be supplied over a range of prices in a particular time period

58
Q

What is market structure?

A

depicts how firms are differentiated and categorised based on the types of goods they sell and how their operations are affected by external factors and elements.

59
Q

What is market power?

A

The ability of a firm to influence the price a product or service is sold at

60
Q

What is the idea of pure competition market structure?

A

It is a theoretical model of perfect competition. It does not truly exist in real life

61
Q

What is the idea of monopolistic competition market structure?

A

Here, there are many small firms in the industry, and is a form of imperfect competition. Here, firms have to rely on product differentiation to have control over price. Advertising plays a massive role in attracting new customers and making existing ones

62
Q

What is the idea of an oligopoly market structure?

A

A small number of large firms dominating the industry. Here, firms constantly monitor behaviour of rival firms in the industry, and has to consider reactions of competitors when changing prices or policies. Here, oligopolists tend to compete through advertising their products as opposed to price cutting

63
Q

What is the idea of a monopoly market structure?

A

Only one producer in the industry. Here, advertising is unnecessary because they don’t need to win over customers, as there aren’t any competitors

64
Q

What are the five characteristics of a pure competition market structure?

A

Many small buyers and none of them are large enough to affect the market price

Products sold by all firms are homogenous

Buyers do not incur any cost for changing suppliers

No barriers to new films entering or existing firms leaving the market

Sellers can sell as much of their product at market price

65
Q

Why do firms in a pure competition market have to be ‘price takers’? (meaning that they have to accept thee market price)

A

Because noone sells above market price (because buyers can get same product at lower prices)

Noone will sell below market price (because it is not profit maximising)

66
Q

What are three characteristics of a monopoly?

A

There is only one firm selling the product, and there is no market competition at all

The product being sold has no close substitute

There are significant barriers to entry

67
Q

Why are monopolists the price setters? (set the price of the product)

A

Because there aren’t enough competitors to compete with them on a price level.

68
Q

True or false? Generally, as level of competition increases, prices are likely to fall and output increase

A

True

69
Q

What are four characteristics of a monopolistic competition?

A

A large number of relatively small firms

Products sold are similar but not identical (because of need for product differentiation)

Because of product differentiation, some firms can have some price-setting power

70
Q

What are three characteristics of an oligopoly?

A

There are only a few relatively large firms, each of which have a significant share of the market

Sell similar but differentiated products

Significant barriers to entry

71
Q

What are examples of oligopolies?

A

Supermarkets; dominated by Woolworths and Coles

Airlines in Australia; Virgin, Qantas

72
Q

What are examples of monopolies?

A

Natural gas, electrical and other utility companies. These exist as NATURAL monopolies.

73
Q

What are examples of monopolistic competition?

A

Restaurants, hair salons, clothing

74
Q

What is a natural monopoly?

A

A natural monopoly is a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming advantage over potential competitors.

75
Q

HOW and WHY has the
government tried to
change these market
structures?

A

Wants to prevent market structures which are monopolistic as it undermines consumer sovereignty and also that means that there is no competition, and the market is free to set prices to whatever they want, even though it may have negative impacts on the consumers

76
Q

What is meant by
“consumer welfare” in
relation to market
structures?

A

Ensuring that the consumer’s goals are being met in various market structures through allowing for consumer sovereignty, etc.

77
Q

What is the law of supply?

A

an increase in price results in an increase in quantity supplied

78
Q

What are price floors?

A

A price floor is a minimum price which is chargeable for a certain good or service and is normally set by the government

79
Q

What are price ceilings?

A

A price ceiling is a maximum price which is chargeable for a certain good or service and is normally set by the government

80
Q

What are externalities?

A

Externalities refers to situations when the effect of production or consumption of goods and services imposes costs or benefits on others which are not reflected in the prices charged for the goods and services being provided.

81
Q

What are merit goods?

A

A merit good is a good which when consumed provides external benefits, although they may not be fully recognised as beneficial, thus the good is under-consumed. These can be excludable. Generally, it’s not
supplied by private businesses because of lack of profit

I.e. Education and healthcare

82
Q

What is a social wage?

A

Social wage is a set of basic, universal benefits available to all, i.e. Medicare, Public School

83
Q

What is price elasticity?

A

The responsiveness of Demand or supply to a change in price

84
Q

What are factors affecting elasticity of demand? (4)

A

Necessities and luxuries
Existence of close substitutes
Proportion of income spent on the good
Length of time since a price change

85
Q

What are factors affecting elasticity of supply? (2)

A

a

86
Q

What are factors affecting elasticity of supply?

A

a

87
Q

What is price elastic?

A

Demand is price elastic if the change in the quantity demanded is proportionately greater than the
initial change in price e.g. if the price of new cars fell by 5% and the demand for new cars increased

by 10%, the demand for new cars is relatively price elastic.

88
Q

How do necessities and luxuries affect elasticity of demand?

A

Necessities are most likely to be inelastic because demand has to remain even if price increases

Luxuries are more durable goods. The more durable a good is, the more elastic the demand is relative to single use goods.

89
Q

How do existence of close substitutes affect elasticity of demand?

A

Goods for which close substitutes exist tend to have a relatively more elastic demand than goods for which there are few if any close substitutes (i.e. elasticity). This is because people can easily switch if they want, thus affecting elasticity

90
Q

How does the proportion of income spent on the good affect elasticity of demand?

A

If proportion of consumer income spent in consuming a good is small, the demand for the good will be relatively inelastic

However, if there is a higher proportion of consumer income spent on goods, the demand for it becomes extremely price elastic

91
Q

How does the length of time since a price change affect elasticity of demand?

A

In general terms the greater the lapse of time, the higher is the elasticity of
demand because consumers will adjust their demand according to the development of substitute goods
and services. If the price of a good or service rises and there are few substitutes available, consumers may
continue consuming similar quantities of the good or service.

92
Q

What is unit elastic?

A

Unit elastic if the change in the quantity demanded is proportionately the same as the
initial change in price e.g. if the price of tomatoes rose by 10% and the demand for tomatoes fell
by 10%, the demand for tomatoes is unit elastic.

93
Q

How does Price of good or service affect supply?

A

the higher the price and mark up that a producer can get for the
product or service in the market, the greater the incentive to supply depending on supply costs.

94
Q

How does price of other goods and services affect supply?

A

if the prices of alternative goods and services are higher than
others, producers may switch to supplying the alternative goods and services if prices and profits are
potentially higher in the market.

95
Q

How do prices of factors of production/resources affect supply?

A

resources: lower production costs will enable producers
to increase supply over a range of prices, whereas higher production costs will force producers to
reduce their supply.

96
Q

How does the state of technological progress affect supply?

A

technological advances may lead to lower production costs, less
lead time and new products, which enable producers to increase supply.

97
Q

How does expectations of producers affect supply?

A

if producers expect a large demand for a certain product or
service in the market, they will take risks and invest in production to capitalise on profitable
market opportunities.

98
Q

How do seasonal influences affect supply?

A

changes in climatic conditions will affect agricultural output, and other
production activities may be influenced by seasonal variations in demand, which can impact
on supply in markets

99
Q

Look at extension and contraction as well as shifts in supply and demand curve

A

Also look at price floors and ceilings ,

100
Q

What are five factors influencing shifts in supply curve?

A

Change in prices of other goods and services

Changes in prices of factors of Production

Changes in Technology

Changes in producer expectations

Changes in seasonal influences

101
Q

What causes an extension in supply?

A

When price of good or service rise and producers respond by increasing supply in expectation of increasing profits

102
Q

What causes a contraction in supply?

A

When price of good or service falls and producers decrease their supply in market in order to minimise costs of production

103
Q

What are the differences between shifting the supply curve to the left or to the right?

A

Right: Increase in supply
Left: Decrease in supply

104
Q

What are five factors influencing shifts in supply curve?

A

Change in prices of other goods and services

Changes in prices of factors of Production

Changes in Technology

Changes in producer expectations

Changes in seasonal influences

105
Q

What are the differences between shifting the supply curve to the left or to the right?

A

Right: Increase in supply
Left: Decrease in supply

106
Q

Change in prices of other goods and services

A

Changes in the prices of competing or alternative goods and services in the market will affect the relative
profitability of producing an existing good or service.

For example, if the price of the existing good or service supplied rises relative to other goods and
services, other entrepreneurs may switch resources into its production. In this case the entrepreneur and
new entrants to the industry may increase the supply of the existing good or service in the market.

107
Q

Changes in prices of factors of Production

A

A rise in the prices of the factors of production (i.e. wages, rent, interest and profit) will raise production
costs for the firm or industry and reduce profitability. Thus firm makes decision to perhaps cut back on production to increase profitability

A fall in prices will have a different effect

108
Q

Changes in Technology

A

Improvements in technology usually lead to increased efficiency and productivity of the factors of
production. Technological advances tend to reduce production and
selling costs, enabling firms to increase supply.

109
Q

Changes in producer expectations

A

Many entrepreneurs and managers may have preferences for a particular type of production or type of
good or service to produce because of knowledge, experience, expertise and skills in the industry.

110
Q

Changes in seasonal influences

A

Changes in seasonal influences are most relevant to the supply of agricultural produce. Favourable seasonal conditions will have beneficial effects and increase supply, however if seasonal influences are poor, it will decrease supply

I.e. whether or not there are floods or droughts

111
Q

Changes in seasonal influences

A

Changes in seasonal influences are most relevant to the supply of agricultural produce. Favourable seasonal conditions will have beneficial effects and increase supply, however if seasonal influences are poor, it will decrease supply

I.e. whether or not there are floods or droughts

112
Q

What are factors affecting elasticity of supply?

A

Inventories (or ability to hold stocks)

Extent of excess capacity

Production time periods (depending on the time period there may be different elasticities of supply

113
Q

What are the three production time periods?

A

Market period, Short run, long run

114
Q

What is market period?

A

In the market period supply cannot be adjusted due to changes in price, as the quantity supplied to the
market is fixed, since inventories or stocks of unsold goods are finite

115
Q

What is short run?

A

In the short run producers have both fixed and variable factors, but can adjust supply due to small
changes in price, by using their existing plant size (the fixed factor) more or less intensively.

116
Q

What is long run?

A

In the long run producers can vary their plant size and adjust output levels in response to small changes
in price. Supply is highly elastic in the long run

117
Q

Why is inventory (ability to hold stocks) important for elasticity of supply?

A

If producers are able to hold stocks of unsold goods or inventories, their supply will be more elastic
than if they are not able to hold stocks which can supplement current levels of output or supply.

The ability to hold stocks depends on the nature of the good (i.e. whether or not it is perishable), the
extent of storage capacity, and the nature of distribution in the industry. The greater the ability to hold
stocks or inventories, the more elastic the supply in a market.

118
Q

Why is extent of excess capacity important for elasticity of supply?

A

Excess capacity refers to the difference between the actual and potential output of a firm with a given
level of plant capacity. If a firm has excess capacity, it may be able to respond quickly to rises in price
by increasing its production, by using its existing plant more intensively. Its supply will be therefore be
more elastic than a firm operating at full or maximum capacity.

Similar, vice versa

119
Q

Is the steeper or more flat supply curve elastic?

A

The more flat it is, the more elastic it is, the more steep it is the more inelastic it is

120
Q

What is price elasticity of supply?

A

Refers to responsiveness of the quantity suppled due to small change in price of a good or service

121
Q

What does it mean if supply is price elastic?

A

Supply is price elastic if the change in the quantity supplied is proportionately greater than the
initial change in price e.g. if the price of new cars rose by 10% and the supply of new cars increased
by 15%, the supply of new cars is relatively price elastic;

122
Q

What does it mean if supply is price inelastic?

A

Supply is price inelastic if the change in the quantity supplied is proportionately less than the
initial change in price e.g. if the price of cigarettes rose by 5% and the supply of cigarettes rose by
1%, the supply of cigarettes is relatively price inelastic; and

123
Q

What does it mean if supply is unit elasatic?

A

Supply is unit elastic if the change in the quantity supplied is proportionately the same as the initial
change in price e.g. if the price of tomatoes rose by 10% and the supply of tomatoes rose by 10%,
supply is unit elastic.

Economics Year 11 (9 decks)

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