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Flashcards in C1: Competitive Markets Deck (116)
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1
Q

Define Demand

A

The quantity of a good/service that consumers need or desire

2
Q

Describe the shape of a demand curve

A

Downward slope

3
Q

What does an increase in price cause demand to do?

A

Contract

4
Q

Want does a decrease in price cause demand to do?

A

Extend

5
Q

How does the law of diminishing utility explain the downward sloping demand curve ?

A

With each unit consumed the utility gained and subsequently demand for the next depreciates. As a result of this law they are only willing to pay the price that satisfies that utility. So if the price is seen as too high then the quantity demanded decreases, if the price is low then the quantity demanded increases as marginal utility > price

6
Q

How does the income effect explain the demand curve shape?

A

With increased real income consumers can exercise greater demand and so are willing to pay higher prices to meet that demand. If real income decreases then the demand and therefore price decreases

7
Q

How does the substitution effect explain the demand curve shape?

A

As substitutes for a product become cheaper then the demand for that product decreases and so prices have to decrease so to remain in the market

8
Q

What may cause the demand curve to decrease/ or shift (up/left)/(down/right)?

A

Fashion changes, company reputation, cultural changes

9
Q

What does a shift in the demand curve mean?

A

Demand for a good or service has changed at each price level

10
Q

What are substitutes and how can they affect demand for a product?

A

Products that rival and compete for the same consumers as another producer in the same market. An increase in price of one can cause the demand for the other to increase as its now seen as the markets best cheap option. If price decreases demand for the other decreases as they are now seen as too expensive

11
Q

What are complementaries and how ca they affect demand?

A

When one product pairs with or is related to another in a way that results in parallel changes in the consumption of both. If demand for one increases then the demand for the complimentary also decreases as they are frequently bought together and vice versa

12
Q

How may the introduction of a new good or service impact demand?

A

Substitutes, will lead to a decrease in market share for pre-competing market members but may decrease over time if the new product proves unpopular, however if popular and becomes the main or a major stakeholder of the market then pre-existing market members will experience long term market share loss

13
Q

What is derived demand?

A

When the demand for one product causes the demand for another (usually factors of production) to also increase so that the increased demand for the initial product can be met

14
Q

What is composite demand?

A

When one product (usually factor of production) has multiple uses. If the demand for one of these uses increases relative to alternative uses then it will mean resources and demand for the in demand use will increase while alternatives will experience decrease. Or the product could be stretched across many different uses, resulting in excess demand for some of these uses

15
Q

What is Price Elasticity of Demand?

A

Measure and representation of how much demand changes in response to changes in price

16
Q

How do you calculate PED?

A

(% change in demand➗% change in price) X100

17
Q

If PED (ignoring sign) > 1 what does this mean?

A

Elastic demand. A small change in price results in a ,argue change in demand. The greater PED means greater elasticity

18
Q

Describe the gradient of an elastic PED?

A

Gentle

19
Q

What does the result for PED number mean?

A

It represents what 1% change in price causes % change in demand

20
Q

What does it mean if PED = 0

A

PED is inelastic (ignoring signs). Change in price results in a smaller change in demand. Closer to 0 the more inelastic

21
Q

Describe the gradient of an inelastic PED?

A

Steep

22
Q

If PED =1 or -1 what does this mean?

A

Unit-Elasticty. A decrease in price of x% results in a decrease of demand by the same x%. Maximum revenue achieved

23
Q

How do substitute goods affect PED?

A

Markets with lots of substitutes will mean a products demand is elastic because if the price increases or decreases for one then the consumers from all competitors swarm away or to respectively from that product as there are plentiful options which provide better or worse value respectively.

24
Q

Describe how an “essential product” affects demand elasticity?

A

If it’s essential then it forms a basic foundation for consumer consumption. It must be consumed and there aren’t luxury alternatives so are inelastic

25
Q

Give an example of an essential product

A

Light, water, gas, food

26
Q

How may “essential” products be different for different consumers?

A

Affluent consumers may perceive what most regard as luxury as essential for example organic fruit instead of normal fruit)

27
Q

Describe how habitual goods affect demand elasticity?

A

Goods that satisfy habits and therefore consumers are unwilling to change their demand for it are inelastic

28
Q

Example of habitual goods

A

Alcohol or Tobacco

29
Q

How do emergency goods or services affect demand elasticity?

A

In an emergency there is an urgency to fix a situation and so the demand is very high regardless of the price resulting in a very inelastic demand

30
Q

Describe how composite goods affect demand elasticity?

A

Goods like oil have many different uses and so if the demand in only one of these uses surged it wouldn’t have much effect on the original good demand as demand for its other uses would persist and level out the effect of a surge from another use so are inelastic

31
Q

Describe how the proportion a product takes up of a person’s real income affects demand elasticity?

A

Products that take up a large proportion will be closely monitored for changes in prices. If the product increases just a small bit this will have a carrying effect upon the demand for many other products consumed if the demand for this product does not change in response. So demand will be elastic because otherwise the consumer cannot purchase the other needed items.

32
Q

How does time affect demand elasticity?

A

Over time a consumers behaviour can change dramatically and so their ability to alter demand follows. They may have broken a habit or experienced greater income to spend that allows their demand for certain items to change

33
Q

If a product is elastic in demand how does this affect revenue?

A

A small price change could result in a greater change in demand and subsequently revenue

34
Q

If a product is inelastic in demand how does this affect revenue?

A

A small change in price won’t affect demand and subsequently revenue as hard

35
Q

If a product is unit elastic in demand how does this affect revenue?

A

Maximum revenue is achieved regardless of any change in price as demand will alter correspondingly

36
Q

What is Income Elasticity of Demand?

A

A measure and representation of how demand changes with changes in income

37
Q

How do you calculate YED?

A

(%change in demand➗%change in income)X 100

38
Q

What is a normal good and a luxury good in relation to YED?

A

A normal good has YED >0 (Positive Gradient) and a luxury good has YED >1

39
Q

What is an inferior good in relation to YED?

A

Inferior good has YED <0 (negative gradient)

41
Q

What is Cross Elasticity of Demand (XED)?

A

How the demand for one product changes in response to changes in the price of another

42
Q

How do you calculate XED?

A

%change in demand for Variable A➗%change in price of Variable B

44
Q

Describe the cross elasticity of demand result spectrum

A

Lesser than 0, the more complimentary the goods are

Greater than 0, the more substitutional they are

45
Q

How is YED different for normal and inferior goods?

A

Normal goods, demand is expected to increase with income rise
Inferior Goods, demand is expected to decrease with income rise

46
Q

How can a YED be used by governments?

A

If YED is known a government can provide or remove goods and services from economy that either satisfy or unnecessarily exceed the demands of consumers in relation to changes in their income.

47
Q

If YED for bus use is elastic and that incomes are reducing how might the government react?

A

By allocating resources towards bus services so that consumers can travel for a price that fits with their real income

48
Q

How might YED be used by producers?

A

1) Sales prediction, they can forecast how much revenue they will make
2) Reduce Supply, in recession or boom firms can reduce or increase supply respectively or even price so to limit their losses or maximise revenue and profit
3) Trade offs, a company may produce normal and inferior goods and so may allocate production resources to one or the other so that revenue is maximised on the in-demand product. This may also be used by multi-brand retailers so to allocate shelf space to normal or inferior goods

49
Q

How might XED be used by producers?

A

If YED for their product is known then a company can respond to competitor changes and behaviour by altering supply or price of their product accurately and effectively to maximise revenue or limit losses

50
Q

Define supply

A

The quantity of a good or service produced by a a producer at a given price at a particular time

51
Q

Describe the shape of the supply curve

A

Upward slope

52
Q

How does an increase or decrease in price affect supply?

A

Increase leads to extension of supply

Decreased leads to contraction in supply

53
Q

Explain the shape of the demand curve

A

If price increases and everything else remains constant then the supply increases so to max revenue and profit

54
Q

What does a shift in the supply curve mean?

A

A change in supply at each price level

55
Q

What may cause the supply to shift (upwards/left)/(downwards/right?

A

Costs of production, number of market producers, trade offs, taxes and subsidies

56
Q

How does the cost of production cause a supply curve to shift?

A

If costs increase then producer has to reduce supply so that 1 unit’s value doesn’t depreciate too much. If costs reduce then the company can increase supply to to enjoy increased profits

57
Q

How does technology affect shifts in supply?

A

Technological advancements can improve efficiency and lead to increased number of units produced for the same costs

58
Q

How does the productivity of factors of production affect shifts in supply?

A

If labour or capital improvements occur then production process becomes more productive allowing output at each price level to increase

59
Q

How do taxes and subsidies lead to shifts in supply?

A

Taxes increase costs either per unit or as a lump sum

Subsidies reduce costs either through cheaper production or lump sum payments that can be incorporated in to profits

60
Q

If a company produces multiple products how might price changes for some lead to shifts in supply for them all?

A

If A experiences increased prices while B’s prices maintain then resources may be diverted towards A production leading to a downward shift in supply for A and an upward shift in supply for B

61
Q

How does the number of market contributors affect shifts in supply?

A

If the number of market producers is flooded then market share for each diminishes with each additional producer, so this may be a sign to shift supply upward/left so they don’t create excess supply

62
Q

What is inter-related supply?

A

When the supply of one product is linked to the production of another

63
Q

What is joint supply?

A

like complimentary demand, joint supply is when the supply of one product increases leading to increased supply of another

64
Q

An example of joint supply

A

The refining process of crude oil increases supply of oil but also leads to increased supply of by-chemicals such as Butane

65
Q

What is the difference between Composite Supply and Competitive Supply?

A

Composite Supply is when the supply one one thing can come from multiple sources, Competitive Supply is when one product can be the supply for many other products.

66
Q

Example of Competitive Supply

A

Oil - can be used for Car fuel (petrol and diesel), aeroplane fuel, plastics and many more

67
Q

Example of Composite Supply

A

Electricity - can come from fossil fuels, solar, tidal and wind power to name a few

68
Q

What is Price Elasticity of Supply?

A

A measure and representation of how much supply changes in response to changes in price

69
Q

How do you calculate PES?

A

(%change in supply ÷ %change in price) x 100

70
Q

If PES >1 what does this mean?

A

Elastic Supply. Small change in price is met by a big and quick change of supply by the producer. Greater the PES the bigger, and subsequently quicker, the change in supply

71
Q

If 0

A

Supply is inelastic. Small change in price results in only a small change in supply. The closer to 0 the more inelastic

72
Q

If PES = 1 what does this mean?

A

Unit-Elasticity. A change in price will be met by an equivalent change in supply

73
Q

What factors influence PES?

A
Time
Unemployment
Perishable/Non-Perishable goods
Stock Levels
Mobility of Factors of Production
74
Q

How does time affect the PES?

A

In the short term the supply is likely to be more inelastic than the long term because the producers haven’t had as long to plan a response and to respond to the change in price.

75
Q

How does time affect PES for different types of production?

A

Simple products such as sandwiches, particularly in the short term, will have a much greater PES than that of complex prodcuts such as shipbuilding becasue the latter requires advanced labour and capital, both which take time to recruit and produce, in order to alter production and subsequently supply

76
Q

How does unemployment affect the PES?

A

During times of mass unemployment there is a greater pool of labour, of whom are likely eager to work, which a producer can recruit from quickly and subsequently translate into a rapid supply extension .

77
Q

How does whether or not the goods are perishable or non-perishable affect the PES?

A

Perishable goods, such as flowers, don’t keep for long and so if production wanted to be stepped up there would be obstacles. Such as the availability of land and ability to preserve the good’s quality needed for sale, so the supply is inelastic.

78
Q

How does a company’s stock levels affect PES?

A

If the stock levels are higher than needed usually then if the company wanted to suddenly increase the supply to market they are able

79
Q

How does the mobility of different factors of production affect PES?

A

If the FOP are easily transferable to a new production line at required production efficiency the company can quickly increase output level and supply to market

80
Q

Define Market Equilibrium

A

Point where supply meets demand. The price consumers are willing to pay meets the price producers are willing to sell for

81
Q

What is Excess Supply?

A

When supply of a good/service is greater than its demand at the given price level

82
Q

What is Excess Demand?

A

When demand for a good/service is greater than that of it supplied at that price level

83
Q

What may consumers do if excess demand occurs?

A

Contract demand because the price producers are selling at is greater than that of which consumers are willing to pay

84
Q

What may producers do in the event of excess supply?

A

Contract supply because they are loosing money on all the units which are not demanded at that price levelby the consumers

85
Q

What effect does an upward shift of price at the same quantity of units supplied/ leftward shit of quantity supplied at each price level have upon the equilibrium?

A

The quantity demanded contracts as price per unit has increased. The producer will likely experience excess supply at the old equilibrium price and so contract supply to meet the contracted demand

86
Q

What effect does a downward shift of price at the same quantity of units supplied/rightward shift of quantity supplied at the same price level have upon the equilibrium?

A

The quantity demanded extends as price per unit has decreased. The producer will likely witness excess demand at the old equilibrium price and so extend supply to meet extended demand equilibrium

87
Q

What effect does an upward shift of price at the same quantity of units demanded/ rightward shift of quantity demanded at each price level have upon the equilibrium?

A

The quantity supplied extends as the price consumers are willing to pay per unit has increased. Producers will likely experience excess demand at the old price level so extend supply to meet extended demand equilibrium .

88
Q

What effect does an downward shift of price at the same quantity of units demanded/ leftward shift of quantity demanded at each price level have upon the equilibrium?

A

The quantity supplied contracts as the price consumers are willing to pay per unit has decreased. Producers will likely experience excess supply at the old price equilibrium so contract supply to meet contracted demand equilibrium

89
Q

If demand or supply is elastic, how much does this affect the price and quantity level of the market equilibrium in the event of a shift?

A

Impact upon quantity Eq. > Impact upon price Eq.

90
Q

If demand or supply is inelastic, how much does this affect the price and quantity level of the market equilibrium in the event of a shift?

A

Impact upon price Eq. > Impact upon quantity Eq.

91
Q

What are the 3 assumptions for the S&D relationship in order for it to work, which make it unrealistic?

A

S&D are indpt. > Not always possible
Total Free Market Required > unlikely in modern world
Ceteris Puritus > All other factors are constant (impossible)

92
Q

What is the price mechanism?

A

How the price affects behaviour and outcomes within a market

93
Q

What is the “Incentive” function of the PM?

A

Changes in price motivate producers to act in a certain way. If overall market supply for a good/service shifts left (decreases) then this causes price at each level to increase. This motivates remaining market suppliers to extend supply to secure a greater share of the market and take advantage of higher prices for a now scarcer good/service

94
Q

What is the “Signalling” function of the PM?

A

Increased price will signal to consumers to leave the market as the price per unit is stupidly high, however to producers it signals to enter a market as profit margins increase. Comparatively, if price decreases this may signal to new producers to not join a market because profits will be insignificant but to consumers signals take advantage of low prices

95
Q

What is the “Rationing” function of the PM?

A

An increase in price at each level (due to scarcity) is to act as a deterrent to consumers not to demand so that the resource can be rationed and not over consumed

96
Q

In what respect is it an advantage that the PM allows for the allocation of scarce resources?

A

Ensures scarce resources are allocated efficiently only towards the demands of society at a particular time

97
Q

In what respect is it an advantage that the PM allows for the freedom of consumer choice?

A

Consumers are able to choose what they want in a specific quantity at a particular time. Freedom

98
Q

In what respect is it an advantage that the PM allows for the optimum/ minimal prices?

A

In free markets its important for producers to supply goods/services at a price that attracts most consumers towards them and away from competitors whist making profit. In order to do this the costs of production must be kept low relative to competitors and efficient operation is key. This will allow for lower prices that benefits consumers and producers.

99
Q

In what respect is it an advantage that the PM is self-operative?

A

The mechanism doesn’t require regulation and surveillance in order to work and so doesn’t cost anything

100
Q

In what respect is it a disadvantage that the PM deepens the inequality gap?

A

Goods/ Services which are not in demand and so are not supplied to the market in vast quantities (e.g medicine) are scarce so feature high prices. For those consumers which are disadvantaged in a way that makes these certain products less affordable but necessary, this is unfair.

101
Q

In what respect is it a disadvantage that the PM leads to a reduction in the supply of merit goods?

A

Merit Goods are essential to an economy (e.g education and healthcare) and are usually overlooked or seconded as they are commonly provided for by the government. The PM allows for the production of goods and services in demand, however Merit goods may not be recognised as needing to be in demand in the present so in the future there is no supply of them.

102
Q

In what respect is it a disadvantage that the PM leads to the increased supply of demerit goods?

A

Demerit goods have Positive externalises but could likely be habitual goods (e.g alcohol, tobacco, pollutants) or viewed as essential. The demand and subsequently supply of them is high, resulting in widespread damage

103
Q

In what respect is it a disadvantage that the PM leads to a reduction in the supply of Public Goods?

A

These are goods and services that benefit all aspects of society and don’t depreciate in quality with consumption. They include Police and infrastructure which similarly to merit goods may be overlooked in demand and supply.

104
Q

In what respect is it a disadvantage that the PM does not favour the unskilled or disabled?

A

The mechanism focuses heavily upon efficiency of which technology and machinery is designed for, more so than the unskilled or disabled, this could lead to mechanisation and mass unemployment

105
Q

Define Consumer Surplus

A

When the consumer pays less than what they were willing to pay for a good or service

106
Q

Define Producer Surplus

A

When the producer sells a good/ service for more than what they needed to

107
Q

On a supply and demand curve what area’s represent the consumer surplus and producer surplus?

A

Consumer surplus is represented by the area above the price equilibrium and below the demand/marginal utility curve
Producer Surplus is represented by the area under the price equilibrium and above the supply curve

108
Q

Define Subsidy

A

A payment made to a producer of a good/service either as a lump sum or per unit produced that is intended to reduce the costs of production and reduce prices

109
Q

How does a subsidy lead to reduced prices?

A

it allows the producer to increase supply output through investments in to production process or reduce costs with same proces with the payment received at each price level. Both ways the quantity increases at each price level

110
Q

If demand is elastic how does this benefit consumers and producers differently?

A

Producer gain is better because they experience a greater increase in demand relative to the decrease in price
Consumer gain is less because they experience lower prices but they could be lower

111
Q

If demand is inelastic how does this benefit consumers and producers differently?

A

Consumer gain more because they now experience a much greater decrease in price for not much change in their consumption
Producer gain is less becomes although they now experience greater revenue the profit margins could be greater

112
Q

Define Indirect Tax

A

An increase in producer costs either through a lump sum payment to government or on each unit supplied to market

113
Q

How does an indirect tax lead to increased prices?

A

The costs of production for producers increase so in order to cover them and make profit they also increase the prices

114
Q

If demand is inelastic how does the tax burden consumers and producers differently?

A

Producer burden is greater because they are less able to reduce demand (due to nature of good) in reaction to a greater increase in price
Producer Burden is less because they now experience much reduced revenue but could be worse

115
Q

If demand is elastic how does the tax burden consumers and producers differently?

A

Producers burden is much worse because they experience a much more sever reduction in revenue
Consumer Burden is bad but less bad because the have the greater ability to reduce demand in response to much higher costs

116
Q

What area on a supply demand curve represents the consumer burden?

A

Thickness between the old and new price equilibrium and the length up to the new quantity equilibrium

117
Q

What area on a supply demand curve represents the producer burden?

A

The lost revenue (Reduced length to new Eq. quantity and the thickness is amount the producer receives from the new price Eq.)

118
Q

What is deadweight loss?

A

The loss of quantity sold and the price difference between the two equilibriums that occur as a result of a tax