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Introduction To Business Economics > Week 1: The Market Mechanism > Flashcards

Week 1: The Market Mechanism Flashcards

1
Q

What is a market?

A

A place where parties can come together to exchange goods and services usually for money (can be either physical or virtual

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2
Q

3 roles of prices

A
  • Send signals
  • Rations resources
  • Provides incentives
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3
Q

Sends signals - role of prices

A

Prices send messages to economic agents to help to make economic decisions I.e a price increase/decrease indicates scarcity/abundance

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4
Q

Rations resources - role of prices

A

I.e higher prices reduce demand which allows goods to be distributed to those willing to play

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5
Q

Provides incentives - role of prices

A

Higher prices = higher profits = producers increase production

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6
Q

What is demand?

A

Is the quantity of a good that buyers wish to continue to purchase at each conceivable price

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7
Q

Characteristics of demand curves (4)

A
  • Refer to a single product or good
  • It doesn’t represent one singular quantity
  • It represents the different qualities that all buyers would purchase at each conceivable price, ceteris paribus (means ‘holding everything else equal’)
  • Demand curves represent the relationship between price and demand
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8
Q

Example of an individual demand curve

A
  • This is derived from tastes of an individual
  • There is a negative relationship between price and quantity demanded
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9
Q

What is a market demand curve?

A

Is the horizontal summation of the indivual demand curves

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10
Q

Characteristics of market demand curves

A

• Market demand is obtained by adding the individual demands

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11
Q

What is demand determined by?

A
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12
Q

What three factors shift the demand schedule?

A
  • Income (y)
  • Price change if another good (good z)
  • Tastes and preferences
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13
Q

How does income (y) shift the demand schedule? (2)

A
  • For normal goods as income increases the quantity demand also increases
  • For inferior goods as income increases the quantity demanded decreases
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14
Q

How does the price changing of another good (good z) shift the demand schedule? (2)

A
  • Complementary goods such as cars and petrol - if car prices go down demand for petrol will increase
  • For substitute goods such as tea and coffee - if tea prices go up there is likely to be a greater demand for coffee
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15
Q

What is the factor which causes a movement along the demand schedule?

A

A change in the price of the good

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16
Q

What is the difference between ‘moving along’ and a ‘shift’ of a demand schedule?

A

A shift is called “a change in demand” where as moving along is called “a change in the quantity demand”

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17
Q

Example of a moving along curve

A
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18
Q

What is supply?

A

Is the quantity of a good that producers are willing to produce at each conceivable price

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19
Q

Characteristics of supply (3)

A
  • Supply refers to a single product/good
  • It doesn’t represent one singular quantity but represents all that producers would sell at every possible price
  • The relationship between price and quantity supplied can be represented as a supply curve
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20
Q

Characteristics of a supply curve (2)

A
  • Supply curve is upward sloping
  • There is a positive relationship between price and quantity supplied
21
Q

What factors affect the supply curve? (4)

A
  • Technology
  • Input prices (e.g wages and raw material costs)
  • Government regulations (e.g taxes)
  • The price of the good
22
Q

What factors SHIFT the supply schedule? (3)

A
  • Technology - technology increases so quantity supplied increases
  • Changes in input prices - decreases then quantity supplied increases
  • Goverment regulations e.g subsidy
23
Q

What factor cause a MOVING ALONG the supply curve?

A

A change in the price of the good

24
Q

What is the shift of a supply curve known as?

A

A change in supply

25
Q

What is the movement along a supply curve known as?

A

A change in quantity supplied

26
Q

What is market equilibrium? (2)

A
  • Is the point on a supply and demand graph where the two points intersect
  • P1 = the market clearing price which is the price where whatever is produced at that price is also consumed at that price
27
Q

Market disequilibrium graph when there is excess supply (2)

A
  • If the price were at P2 there would be excess supply which can be quantified by doing Q3 - Q2
  • Therefore to sell excess stock the supplier must reduce the price
28
Q

Market disequilibrium graph when there is excess demand (3)

A
  • If price were at P2, there would be excess demand which can be quantified by Q3 - Q2
  • At P2, consumers want to demand more (Q3) than producers wish to supply (Q2)
  • Suppliers respond by increasing the price until equilibrium is reached again
29
Q

What is assumed with ceteris paribus?

A

It’s assumed that nothing else is changing

30
Q

Impact of decreasing income on the market mechanism (4)

A
  • A decrease in income leads to a decrease in demand therefore demand shift to the left from D1 to D2
  • Equilibrium then moves from point A to point
  • Price decreases from P1 to P2
  • Quantity demanded decreases from Q1 to Q2
31
Q

What is a price floor? (2)

A
  • Is when the price is artificially held above the equilibrium price so the price is not allowed to drop below this level
  • Governemnts may do this because they feel the market clearing price is too low
32
Q

Examples of price floors (2)

A
  • Minimum wage (exploited workers)
  • Minimum price on alcohol (public health)
33
Q

Price floor diagram (alcohol example) (2)

A
  • Minimum price creates a market disequilibrium
  • Qs - Qd is what’s not being consumed
34
Q

What is a price ceiling? (aka max price) (2)

A
  • Is when price is artificially held below the equilibrium price so the price is not allowed to rise above this level
  • Government may do this as they feel the market clearing price is too high
35
Q

Example of a price ceiling

A

Rent control - in order to have affordable living

36
Q

Example of a price ceiling diagram (rent example) (2)

A
  • Qd > Qs there is excess demand
  • Qd - Qs = People who have no home
37
Q

Lionel Robbins (1932) economics definition

A

Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses

38
Q

Alfred Marshall’s economics definition (2)

A
  • A study of mankind in the ordinary business of life
  • It examines that part of an individual and social action i which is most closely connected with the attainment, and with the use of material requisites of well being
39
Q

When is a good/service scarce?

A

If it has an oppurinity cost

40
Q

What is an opportunity cost? (3)

A
  • Is the true cost of a choice and the value of the next best alternative foregone where a choice needs to be made between severally mutually exclusive alternatives given limited resources
  • Expresses the basic relationship between scarcity and choice
  • Costs and benefits are weighed up of the choice and the alternatives choices
41
Q

What does a production possibility frontier (PPF) show?

A

It shows the maximum possible output combinations of two goods or services an economy can achieve when all resources (land, labour & capital) are fully and efficiently employed

42
Q

Characteristics of a production possibility frontier (PPF) (4)

A
  • A, B and C are efficient output combinations lying on the PPF
  • D and E are inefficient combinations - not all resources fully utilised
  • F is an output combination that is not yet attainable
  • Oppurtunity cost of service output in terms of manufacturing output increases as we move down the PPF
43
Q

Different allocation systems (3)

A
  • The command economy e,g North Korea, former USSR
  • The free market economy e.g USA prior to the 1930
  • The mixed economies e.g most modern economies
44
Q

What is the difference between positive and normative economics?

A
  • Positive economics has objective explanation
  • Normative economics has prescriptions based on value judgement
45
Q

Example of positive economics

A

A tax being imposed on cigarettes therefore increasing cigarette prices

46
Q

Example of normative economics

A

A tax should be imposed on tobacco to improve public health

47
Q

What is microeconomics?

A

Is the branch of economics that markets behaviour of indivual consumers and firms in an attempt to understand the decision making process of firms and households

48
Q

What is macroeconomics?

A

Is the field of economics that studies the behaviour of the aggregate economy

Introduction To Business Economics (9 decks)

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