Week 2 Flashcards
Define market
a group of buyers and sellers of a particular good or service
Define competitive market
A market in which there are many buyers and sellers so that each has little impact on the market price (price takers)
Define the law of demand
all things being equal - the quantity demanded of a good falls as the price of the good rises
what is ‘collective action’
Private sacrifice for the greater common good
e.g. tackling climate change
what is strategic intervention
Private and public goods e.g. cooperative and uncooperative outcomes
Define demand schedule
A table that shows the relationship between price of a good and the quantity demanded
Demand curve = relationship between price and quantity demanded
Define normal good
An increase in income leads to an increase in quantity demanded
Define inferior good
An increase in income leader to a decrease in quantity demanded
Define substitutes
two goods for which a decrease in the price of one good leads to a decrease in demand for the other good
e.g. ferrari sale = less demand for mclaren
Define complements
(e.g. tv and dvds)
Two goods for which a decrease in the price of one good leads o an increase in demand for the other
Mechanisms for allocating scare resources
Markets
–Fixed prices, auctions, matching other than price
Hierarchies
–Central planners & Administrators
To reach the highest form of competition a market must:
- Offer goods that are exactly the same (homogenous)
2. There are so many buyers and sellers that individuals do not influence the market price
Source of demand
- Survival (needs)
- Desire (wants)
Determinant of quantity demanded:
• Price of good (P)
Determinants of demand
- Price of substitutes and complements (shift)
- Income (movement along demand curve)
- Tastes and preferences (shift)
- Expectations (shift)
- Number of consumers (shift)
(TENPI)
differences between shifts and contractions
Movement ALONG a demand curve
•SHIFT in the demand curve
Source of supply
Individuals supply labour effort
–Businesses supply raw materials and finished products –Organisations supply services
Determinants of quantity supplied
• Determinants of Supply: Price Of Related Commodity (Py) • Factor Cost (w) • Number Of Suppliers (Ns) • Technology (Tech) • Seller Expectations (Expects)
Define the law of supply
quantity supplied will increase as the price of the good rises
Define equilibrium price
The price that balances quantity supplied and quantity demanded
difference between surplus and shortage
Surplus = Situation in which quantity supplied is greater than quantity demanded
Shortage = Situation in which quantity demanded is greater than quantity supplied
*see diagram page 82 *
what do prices do
reflect scarcity
explain Pareto efficiency
can’t make any one person better off, without making someone else worse off
• Occurs when
Price = Marginal Benefit = Marginal Cost
Define welfare economics
Study of how the allocation resources effects economic wellbeing
Define consumer surplus
A buyers willingness to pay minus the amount the actually pays
• The area lying below the demand curve and above the equilibrium price
• What they think it’s worth – what they pay
willingness to pay = The maximum amount that a buyer will pay for a good
Define producer surplus
The amount a seller is paid for a good minus the sellers cost
• Area lying above the supply curve and below the equilibrium price
Factors affecting demand
- Income
- Price of related goods (substitutes + complements)
- Tastes
- Preferences
- Number of buyers
what are sunk costs
Some costs are not included by economists, while they are included by non-economists. Costs are sunk when the expenditure has been completed and cannot be recovered. Sunk costs should be ignored in subsequent rational decisions. Sometimes some of the costs can be recovered but some are sunk, e.g. there may be some resale value
