unit 3 chapter 2 economics Flashcards
what is a market
a market is ay type of arrangement that facilitates an exchange of goods and services between buyers and sellers
where are g + s sold, and where are factors of production sold
a. product markets
b. factor or resource markets
what are conditions of a perfect competition market structure?
- price taking (no individual has the market power to influence price)
- homogenous products (products are identical and substitutable)
- ease of entry + exit (new entrants can capture a shave of a market making more money)
what are the three economic assumptions to a perfectly competitive market structure
- full information - buyers and sellers know what they are selling, and what they are buying and make fully rational decisions
- mobile resources - resources can be allocated towards areas that make most profit
- maximum utility/profit - buyers and sellers want to maximise their own utility
behavior of a consumer in competitive market
- will want to obtain the amount of g + s that maximises their ability at the lowest possible price
- if they are willing to buy at a certain price, it gives suppliers a clear price signal that they values that g + s
- consumer surplus (price consumer is willing to pay and market price)
behavior of business in competitive market
- will sell at highest price to maximise profit
- if they are able to sell product about minimum selling price it shows consumers value g + s
- producer surplus (price producer is willing to sell product for and market price)
what is the law of demand
the law of demand states that as the price increases, the quantity demanded decreases (inverse relationship)
price factors of demand
income effect –> as the price increases, some buyers wont be able to purchase the product anymore since greater percentage of income is required (ability to buy is affected)
substitution effect –> when the price of a good increases, consumers will look at cheaper substitutes so quantity demanded is likely to fall (willingness to buy is affected)
diminishing marginal utility –> each extra unit of g+s consumed adds to a persons satisfaction however benefits falls from each unit, utility is less for the second and so on (willingness to buy is affected)
what is effective demand
real intention (willingness + able) to purchase by people with means to pay
what causes a movement in demand curve
changes in price of a product only
what causes a shift in the demand curve
non price factors of demand, where a new demand curve is shown
what is a contraction of demand
when prices are higher, demand goes lower (movement along demand curve)
what is an expansion of demand
when prices are lower, demand goes up (movement along demand curve)
what are the non price factors of demand
-> interest rates
-> price of substitutes
-> price of complements
-> preferences and taste
-> growing population
-> consumer confidence
interest rates
- reward for lending / cost for borrowing expressed as a percentage of the principle
effects discretionary income because when interest rates go higher so do mortgage payments and stuff, meaning more of it has to go towards those necessities
if interest rates go up, demand goes down
increase in disposable income means:
increase in demand of normal goods
negative impact on inferior goods
what is disposable income
factor income + gov. transfers - direct taxes
factor income after tax income is subtracted
what are normal goods
type of a good which experiences an increase in demand due to an increase in income
eg. vacation
what are inferior goods
those goods the demand for which falls with increase in income of the consumer.
eg. second hand clothing
what is discretionary income
after all discretionary items (housing, food etc) are payed for, what you have left is disrectionary income
price of substitutes
a viable good or service that may be used instead of the product in question
if substitute is cheaper, demand of the original good will decrease
eg. margarine and butter
price of complements
generally consumed together, but usually sold separately
increase of complementary goods might be viewed by the consumer as an increase in combined experience for goods
eg. increase in petrol = decrease in demand for motor vheicles
preferences and tastes
individual preferences, tates and attitude towards a good or service can change over time
eg. role of influencers
growing population/ taste
growing population generally needs more goods and services, affecting the range of g + s sold in the market
eg. infant related products
consumer confidence
measure of households general expectation about future state of the economy
eg. if consumer feels secure about future employment opportunities they are more likely to purchase more and go into debt
what is the law of supply
as the price of a product increases, the quantity supplied increases
what is profit motive
corrects under supply + over supply of goods
how does law of supply explain business behavior
higher prices means increase in revenue
higher prices increase opp cost of using resources for an alternative product
production cost per unit might increase
movement along the supply curve
only happens when the price of a product changes
price factors of supply
willingness to produce -> expectation of product from g + s
ability to produce -> how much output can be produced with given set of input
non price factors of supply
changes in the cost of production
technological change + productivity growth
climate change + disruptions
number of suppliers
changes in cost of production
each good needs factros of production, paying workers more means the price of the good needs to increase
productivity
outputs per unit of input
technological change + productivity growth
new technology often increase productivity which means it increases supply since there is a greater volume being produced for each hour worked
climate conditions + disruptions
materials heavily depend on climate, drought means less water decreasing availability of a key resources raising cost of production reducing quantity supplied
number of suppliers
more suppliers = supply increase
less supply = exist of producers, supply curve shifts left
what is market equilibrium
state of rest where quantity demanded = quantity supplied
movement from disequilibrium to equilibrium
when market is in a state of excess demand or supply due to price being way too low or high, the market pressures will drive it back to the equilibrium
price below equilibrium
shortage -> demand increases and there is a shortage in supply
price above equilibrium
surplus -> surplus -> supply increases and demand ie exceeded by it
what is resource allocation
how factors of production such as land labour and capital are directed towards the production of goods and services top meet the needs of households, businesses and governments
what goods are produced (in australia)
where the resources are being directed in terms of production; why australia using its labour resources to produce mineral exports rather then to manufacture cards
how resources are being used in the production market by business
in a free market, it is assumed that self interest firms will try to minimise their costs of production and ofer the best product they can in their market, this might mean they seek the most efficient way to convert products into the end product
who gets to enjoy the goods and servies produced
markets allocate resources to those that are willing and able to pay
what are relative prices
relative price is seen as the price of any one good or service measured in terms of another good or service, therefore is a measure of opportunity cost since the relative price of one good can be expressed in terms of what is given up to obtain another
what is the price mechanism
describes how forces of demand and supply determine relative prices of goods and services which ultimately determine the way our productive resources are allocated in the economy
price elasticity of demand
percentage change in quantity demanded / percentage change in price
considers the responsiveness of a change in one variable to changes in a factor that affects the variable
HIGH PED (elastic)
a product will have high PED if the absolute value is greater than 1, meaning the percentage in quantity demanded will be greater then the percentage change in price (flat demand cure)
LOW PED (inelastic)
a product will have low PED if the value is less then 1, meaning the percentage change in quantity demanded is less then the percentage change in price (steep demand curve)
MEDIUM PED (unit elastic)
quantity demanded and price may be equal, elasticity value will be exactly 1
why is PED significant for business
important in making business decesions, would operate in business with low PED, from their perspective any percentage increase in price is associated with a smaller percentage decrease in demand increasing revenue for business’.
factors affecting price elasticity of demand
degree of necessity
availability of substitutes
proportion of income
time
degree of nessesity
factor affecting price elasticity of demand
g+s that are deemed to be necessary have low PED, whereas luxury products have high PED
consumers have less choice when it comes to purchase of necessity, since it linked with survival
–> addiction
availability of substitutes
if a product has a large number of viable substitutes, it has a higher PED because consumers are likely to switch to a close substitute quickly when the price of the original product rises
proportion of income
the greater the proportion of income that is needed to purchase a g+s, the higher the PED
EG. house 10% increase is alotttt more therefore demand goes way down
time
over time, PED might increase
short term = consumers tend to undertake buying in habitual fashion, not noticing price increases
long term = may notice the price increase and start to consider possible substitutes
price elasticity of supply
percentage change in quantity supplied/ percentage change in price
measures the responsiveness to the quantity supplied of a good or service to a change in the price of the product
HIGH PES (elastic)
PES greater than one, relatively flat meaning they are willing and able to increase the supply by a larger percentage then price increase
LOW PES (inelastic)
PES less than one, steep, meaning they are unwilling or unable to increase supply if the price increases by a certain percentage
factors affecting price elasticity of supply
production period
spare capacity
durability of goods
production period
if prices increase for a particular product, this will signal to suppliers that allocating their resources into that area may be more profitable, however depending on how fast it will be taken to produced
how fast business will be able to respond to change price signals will vary
low PES or high PES
spare capacity
if firms have spare capacity, this will mean that some factors or production aren’t being fully utilized meaning they have a greater ability to respond quickly to changing prices high PES
other way around if the business are running at productive capacity then there are skill shortages meaning PES is low
durability of goods
if the goods can be stored, then it will be easier to respond to changing prices, high PES
advances in technology have also helped with inventory systems
fresh foods probably have low PES in this regard
