Markets Flashcards
Function of market?
What happens/goes on? Example?
Allocate scarce resources
Each buyer/seller exchanges something they have for something they’d prefer to have instead
Labour for salary - if rational, eco’ists assume tht worker would choose wages but less spare times & employers would pick employee/work potential over money/wage they give them
Mixed economy:
Combines free markets & Gov.
Planned economy?
Gov. decides allocation of resources e.g. North Korea
Free Market?
Supply/demand & price mechanism allocates resources = any prices
Pros of free market economy? (3)
Efficiency - any product can be bought/sold = only those of best value will be in demand so firms have incentive to make goods as efficiently as poss.
Entrepreneurship - rewards for good ideas e.g. new/improved prods = profit = encourages risk-taking & innovation
Choice - incentives for innov. => more choice for cons.
Cons of free market economy? (3)
Inequalities - huge diffs in income = unfair
Non-profitable goods may not be made e.g. medicine for rare med. conds. - not enough sold/profit = no incentive
Monopolies - successful businesses can become only supplier of prod - market dominance
Market failure =? Example? Solution + examples (3)?
When free markets result in undesirable outcomes e,g. traff cong.
Gov. intervention to correct - changing law/tax breaks/other incentive
+ buy/provide g/s
Mixed economy consists of?
*?
Public (Gov.) & Private sector (privately-owned businesses)
Never purely free market eco with no gov. intervention
Positive statements?
Example?
Important in economics because..?
Objective state’s that can be tested by referring to av. evid.
Less income = more shopping in pound shops
Way of testing whether eco ideas are correct/’testable’
Normative statements?
Example?
Important in eco because..?
Subjective + cont. value judgments - opinions
Pensions should be higher = agree/disagree? not true/false?
Value judgements influence eco decision-making & gov. policy
PPFs show? Below? Above?
Max. Poss. Output - what’s poss. using partc. level of res. e.g. partc. no. of people/capital & raw mats
Productively inefficient - with current level of resources, could build of 1 Good without giving up other Good production
Not achievable at current level of resources = extra/better resources needed
Trade off? (3)
When you have to choose between conflicting objectives because you can’t achieve all your obj’s same time
Compromising & aiming to achieve each obj. a bit
To do more of 1 = less of other
Opportunity cost?
Next best alternative you’re forced to give up So trade-off = opp. cost
What causes movement along PPF?
Reallocation of resources - fixed level of resources
What causes shifts in PPF? Examples of both? (2) Why?
Total amount of resources changing = PPF shifts inwards/outwards
Improved tech/improvements to labour e.g. training = outwards because more output prod. possible using same resources
Fewer total resources available e.g. nat. disaster - PPF shifts inwards = negative eco growth
Outward shift represents..?
Economic growth
*Sometimes PPF shifts…?
Only in one direction - stretches hoz/vert.
Poss. output grows but only helps prod. of 1 good
Eco agents’ Objectives?
Different eco agents e.g. producers/cons/gov = diff. eco objectives - max. something e.g. profit
Producers - eco objs?
Why? (3)
Firm’s profit calc. =?
*Other? (2)(2 e.gs) Why?
Assumed to want profit
Profit = firm can survive (loss/failure = eventu. close)
Allows to offer better rewards to owners/shareholders/staff
+ Re-invest in business for more future profits
Total rev minus total costs
*May want to maximise other quantities inst. e.g. total sales/firm’s market share
Bigger firms = oft. consd. more stable = attract best employees
Larger market share = monopoly power = can charge higher £’s due to lack of compt.
Ethical objectives e.g. help local economy - so buy from nearby supplier even if cheaper elsewhere
Consumers’ eco obj?
*? But?
Also*?
Assumed to want to max. satisf. while leaving within their means/not more than income
Satisf = security e.g. large pension contributions/spend on fast cars/holidays
But we assume they act rationally/for themself
Can also act as workers - who want to max. income while having as much free time as they need/want
Governments’ eco obj? Eco’ists?
This means?
Try to balance resources of country with the needs & wants of the population i.e. eco’ists assume govs want to max. “public interest” by achieving 4 eco objs
= Competing objs - policies helping 1 obj might make it more diff, to achieve another e,g, gov. spending may create more jobs but higher inflation?
Specialisation leads to? (2)
Overall adv?
Division of labour (type of spec’tion)
Production split into diff tasks + specific people allocated to each = economy can prod more stuff if people + firms specialise (+countries/regions e.g. tech comps based in Cali)
Advantages of specialisation? (4)
People can spec. in what they’re best as + can improve
= Better quality & higher quantity of prods for same amount of effort overall = increased labour of prod’vity
Spec = one way in which firms can achieve economies of scale e.g. production line
Spec. => more efficient prod’tion = helps scarcity prob. - resources used more efficient = more output can be prod. per unit of input
Disadvantages of specialisation? (3)
Workers = repititive tasks - boredom
Countries = less self-sufficient = probl. if trade is disrupted (e.g. war/dispute) e.g. country could specialise in manufact. so fuel’s an import = whole country in prod. if falls out with fuel supplier
Lack of flexibility e.g. if company moves, workforce left behind = struggles to adapt/dev. new skills e.g. coal mines - non-transferable skills (=structural unemplyoment incr.)
Trade adv.? Why is it so imp? (2) How?
Everyone can buy stuff they’re no longer making themselves
Specialisation makes trade abs. vital - economies (+ indvs + firms) have to be able to obtain what they’re not making themselves
= Necessary to have way of exchanging g&s between c’s Swapping goods = one way country can get what it wants
Most efficient way = money/exch. rate. Money = medium of exchange - both buyer/seller values
Production? (2)
Manufacturing something in order to sell Converting inputs (e.g. raw mats/labour) -> outputs (selling goods)
Inputs? (2) Outputs?
4 FoPs - land/labour/capital/enterprise
Tangible - raw mats/machines + Intangible - ideas/talent/knowledge
Should have exchangeable value (to be sold)
Productivity? (2)
Explanation?
Worked out..? *
Output per Unit of Input Employed
Way of measuring how efficiently company/economy is producing its output If 1 company could take same amount as inputs/FoPs as another but produce more/greater output => greater prod’vity
Could work out overall level of prod’vity (4 FoP’s) as well as any 1 of 4 e.g labour
*Improving 1 FoP prod = increases overall prod’vity
Labour Productivity?
Formula?
Useful for?
Improvements could be result of..? (4)
Output per worker/Output per hr worked
Amount of output prod. in partc. time ÷ total no. of workers/total hours worked by all
Comparing workers against others
Improvs in lab. prod. could be result of of better training/experience/imprv. tech /specialisation - each worker conc. on performing tasks they’re good at/practised a lot/trained = able to prod. more than doing lots of diff tasks
Productive efficiency?
On graph?
Calc. by?
Outputting desired amount of g/s for lowest avg cost of production
Occurs at lowest point on avg cost curve
Total cost ÷ Output;
Graph shows?
At diff points? (3)
Average cost curve = shows how firm’s avg costs of prod. changes as firm’s level of output varies (prod. more/less good)
v. low levels output = high avg cost
level output increases (as firm takes advg of ecos of scale) = firm’s avg cost of prod. falls = firm more efficient
if level of output cont. to increase, firm’s avg of prod = starts to incr. again (diseconomies of scale)
PPF?
Why?
To be prod. efficient, economy must be producing on PPF
Only achieved when waste is eliminated from prod. process - on PPF = working without wasting resources
Economies of scale? (3)
Types?
Cost advantages of production on a large scale
Avg cost to firm = high if not much is made
Make more = avg cost of each falls because of ecos of scale
Internal & External
Internal economies of scale?
(5)
Changes within firm
Technical economies of scale
Purchasing ecos of scale
Managerial ecos of scale
Financial eos
Risk-bearing eos
Technical economies of scale? (3*4)
Production line methods (by large firms) = lots at low avg. cost
Large firms = purchase other specialised equipment to reduce avg costs
Workers - specialise = more efficient (large firms usu.)
Law of measured dimensions
building new warehouse, price = total area walls&roof. if you make dims twice as big, total area=4 times as much so cost = 4ice. *but volume = 8times = more storage space for each ££
Oil tankers - bigger = reduce cost of transp’ing each unit oil
Purchasing economies of scale? (2)
Large firms making lots of goods = need large quants raw materials => negotiate discounts with suppliers
+ Suppliers’ costs = lower if deliver large amounts e.g. fuel, driver - smaller cost per unit
Managerial economies of scale? (2)
Large firms = able to employ specialist managers to take care of diff. areas of business e.g. finance, cust. service = spec. managers gain expertise & experience in spec. area of business = better decision-making abilities in that area
+ no. of managers needed = doesn’t depend directly on amount goods produced e.g. firm won’t need twice as many managers to prod. 2ice many goods = reduces mang’ment cost per unit of unit [labour prod]
Financial economies of scale?
Larger firms = can often borrow money at lower rate of interest - lending seen by banks as less risky if firm’s bigger (more likely to get money back)
??Risk-bearing economies of scale?
Explanation?
Large firms = can diversify into product areas (e.g. make diff things) + diff. markers (e.g. countries)
Demand for any 1 product in any 1 market can vary but diversification = more predictable overall demand (if demand for 1 falls, there’s other products/diff markets whose demand somewhere increases)
External economies of scale? (3)
Local colleges may start to offer courses/qualifications needed by big local employers = reduces firms’ training costs
Large companies in area -> improvements in road networks/local public transport
Lots of firms doing similar/related things locating near each other = share resources e.g research facilites + suppliers could locate in same area = reduces transport costs
Monopoly?
How is a monopoly formed? (2)
Extremely successful companies can gain monopoly power in market
As avg cost for prod. falls, firms can sell at lower £££ - undercutting competition
= Bigger market share - force competitors out of business = only suppllier = it has monopoly
Diseconomies of scale?
Firms can encounter diseconomies of scale as it increases in size = ‘disadvantages of being big’
Internal factors (3)
Wastage & loss can increase - materials seem in plentiful supply so waste more. Bigger warehouses = lost/mislaid
Communication - more difficult as firms grow = staff morale
Managers, less able to control what goes on
If PED = ∞: (2)
Graph:
Perfectly ELASTIC demand
Any increase in price will cause demand to fall to 000
0 < PED < 1 : (3)
Example:
Graph>
INELASTIC demand
%change in £ will cause smaller %change in QD
Smaller PED = more inelastic
Cigarettes = fairly inelastic
PED of 0:
Perfectly INELASTIC demand
Any change in ££ = no effect on QD
PED = +/- 1 : (2)
Unit elasticity
%change in ££ = %change in QD
