Decision Making in Markets Flashcards

Question

ANTI-COMPETITIVE BEHAVIOURS (list)

Answer 1

ANTI-COMPETITIVE BEHAVIOURS Price discrimination Predatory pricing Cartel behaviour Price fixing Exclusive dealing Collusive bidding Market zoning

Answer 2

PRICE DISCRIMINATION Price discrimination involves a business charging consumers different prices for the same product. It enables businesses to maximise revenue by; - imposing a higher price for ‘high value’ customers (namely those with the ability and preparedness to pay more) - and a lower price to ‘low value’ customers (namely those unable or unwilling to pay a higher price). This allows more customers (because even though they get less from the low value customers, it is better than nothing) It is only illegal if it harms competition or is misleading or biased toward groups of people (eg; not for equitable reasons)

Answer 3

PREDATORY PRICING When a dominant company deliberately sets its prices at such a low level that a competitor cannot match, with the purpose of damaging or forcing them to withdraw from the market. Once the competitor is eliminated, the company is then able to again dominate the market, exercise a greater degree of market power and raise prices to the detriment of consumers and society. In effect, the company is behaving like a predator, seeking out and eliminating or devouring its competitors. In a competitive sense, this is normal profit-maximising behaviour of businesses, and would exist regularly if it were not for government intervention.

Answer 4

CARTEL CONDUCT A cartel is defined as two or more businesses joining forces to maximise profits. It means that they agree not to compete against each other and instead develop joint strategies to manipulate the market at the expense of consumers. Cartel conduct includes the following types of agreements. Price fixing Exclusive dealing Collusive bidding Market zoning

Answer 5

CARTELS: PRICE FIXING (PRICE GOUGING) Where companies collaborate instead of compete to set prices together with the purpose of controlling prices, supply and demand, often to the detriment of consumers and society.

Answer 6

CARTELS: EXCLUSIVE DEALING Where companies refusing to supply goods and services to particular companies to control the market prices

Answer 7

CARTELS: COLLUSIVE BIDDING A normal tender is intended to award the contract to the lowest bidder from competitive companies. However, if companies agree to take turns winning the bids and also raise their bids amounts collectively, they can artificially manipulate and inflate the final cost of the tender, meaning higher profit to the winner who also shares the extra profits with the others.

Answer 8

CARTELS: MARKET ZONING/SHARING Market zoning happens when competitors agree to divide a market between themselves so they don’t compete. They may agree to: avoid producing each others’ goods or services serve different geographical areas divide contracts by value assign customers to each competitor, with an understanding not to win each other’s customers.

Answer 9

GOVERNMENT INTERVENTION THROUGH LAWS The Australian Competition and Consumer Act 2010* is designed to protect consumers by outlawing these behaviours What was the result? * formerly known as the ‘trade practices act (1974)’.

Answer 10

IS THERE SUCH THING AS A LEGAL CARTEL? Example of a legalised cartel: Organisation of Petroleum Exporting Countries(OPEC). Made up of 14 oil-producing countries formed OPEC cartels worldwide, their objective is to work together to stabilize the oil market in the countries. They aim to sell oil at reasonable prices to consuming countries.

Answer 11

CARTEL CONDUCT – CASE STUDIES Norwegian shipping firm Wallenius Wilhelmsen Ocean (WWO) were fined $24 million dollars by the Federal Court of Australia for criminal cartel conduct – the largest criminal fine ordered under the Competition and Consumer Act. This conduct involved a cartel arrangement between WWO and its competitors who agreed upon allocating major vehicle manufacturers to cooperate with, thus artificially distorting competitive freight rates.

Answer 12

THE PRICE SETTING MECHANISM Price signals are changes in market prices that convey information to buyers and to sellers to make economic decisions on resource allocation, behaviour, and thus supply/demand Buyers prefer lower prices and so as more the price rises, the less likely to buy (= less demand), and vice versa Sellers prefer higher prices and so as more the price falls, the less willing to produce/sell (= less supply), and vice versa

Answer 13

LAW OF DEMAND Law of demand = as price increases, demand decreases. As price decreases, demand increases. In other words, price affects demand Sellers are more likely to reduce prices if they can get more sales (and thus overall profit) from it, and vice versa Practice: https://practice.mru.org/demandgraph/

Answer 14

MOVEMENT ALONG THE DEMAND CURVE (DUE TO PRICE FACTORS) When there is a price change (due to price factors) and other factors are kept constant, there is a movement along the demand curve As the price increases, less quantity is demanded (there is a contraction in demand) When the price falls, more quantity is demanded (there is a expansion in demand). This terminology MUST be used!

Answer 15

FACTORS THAT HAVE AN EFFECT ON QUANTITY DEMANDED Contraction Changes in quantity demanded caused by price factors for a product are shown by movements along the demand curve BUT; Changes in quantity demanded caused by non-price factors are demonstrated by shifts to the left or right of the demand curve

Answer 16

NON-PRICE FACTORS THAT HAVE AN EFFECT ON QUANTITY DEMANDED Due to non-price factors… When quantity demanded increases at every price, the curve shifts to the right When quantity demanded decreases at every price, the curve shifts to the left. This terminology MUST be used!

Answer 17

NON-PRICE FACTORS THAT SHIFT THE DEMAND CURVE 1 Changes in preferences, fashions and tastes Effect from COVID/Post COVID Work from home Recycled fashion/nostalgia from 80s 90s etc Environmental concerns Success of advertising/media attention Awareness campaigns eg climate change, single use plastics Boycotting products from certain companies/countries Special days (Valentines, Mothers day, Pepero day) 2 Change in population size/age distribution/demographics Growing aging populations Slowing of new births

Answer 18

NON-PRICE FACTORS THAT SHIFT THE DEMAND CURVE 3 Change in disposable income (after tax) Tax changes to incomes Addition/change removal of taxes/levies (eg GST, Medicare) Change in interest rates 4 Consumer Confidence/Sentiment Confidence in economy Saving due to fears of unemployment, inflation, wars, pandemics and impactful world events, economic decline Spending due to confidence of stable income, economic growth, panic buying

Answer 19

NON-PRICE FACTORS THAT SHIFT THE DEMAND CURVE 5 Change in price of substitutes Cabbage was used when lettuce prices increased (due to supply issues). What happened to the price of cabbages (due to higher demand)? 6 Change in price of complements Coffee and sugar prices (if coffee increases in prices, demand for both coffee and sugar will drop) Cheese and cracker prices Fuel guzzling type cars and fuel prices

Answer 20

THE LAW OF SUPPLY Law of Supply = as prices increase, supply increases; as prices decrease, supply decreases In other words, price affects supply Producers more likely to produce (and reallocate resources) if they can get higher prices for it, and vice versa Practice: https://practice.mru.org/supplygraph/

Answer 21

MOVEMENT ALONG THE SUPPLY CURVE (DUE TO PRICE FACTORS) When there is a price change (due to price factors) and other factors are kept constant, there is a movement along the supply curve As the price increases, more supply is demanded (there is a expansion in supply) When the price falls, less supply is demanded (there is a contraction in supply). This terminology MUST be used!

Answer 22

FACTORS THAT HAVE AN EFFECT ON QUANTITY SUPPLIED Changes in quantity supplied caused by price factors for a product are shown by movements along the supply curve BUT Changes in quantity supplied caused by non-price factors are demonstrated by shifts to the left or right of the supply curve

Answer 23

SHIFTS IN THE SUPPLY CURVE (DUE TO NON-PRICE FACTORS) Due to non-price factors… When quantity supplied increases at every price, the curve shifts to the right When quantity supplied decreases at every price, the curve shifts to the left. This terminology MUST be used!

Answer 24

NON-PRICE FACTORS THAT SHIFT THE SUPPLY CURVE 1 Changes in Profitability due to changing Cost of Production, eg; Changes in cost of imported and local raw materials used in production (land, capital) Increase/decrease in wage costs to produce a unit of output (labour) Change in cost of utilities (capital) 2 Changes in Productivity Change in how many units produced in a given time frame 3 Changes in innovation and costs of technology Machines that increase productive efficiency

Answer 25

NON-PRICE FACTORS THAT SHIFT THE SUPPLY CURVE 4 Changes in climatic conditions (agriculture) Flood (eg lettuce prices) Drought Fire Natural disasters Climate change Desertification Pollution 5 Changes in environment (ecosystem) Extinctions of pollinators due to pesticides) Extinctions due to over farming (eg fishes/eels) Extinctions due to Poaching (whales, rhinos) Extinctions of local fauna/flora due to introduced pest species (eg rabbits/foxes/bats/cane toads/starfish)

Answer 26

NON-PRICE FACTORS THAT SHIFT THE SUPPLY CURVE 6 Changes in availability of resources Supply chain issues Political blockages & sanctions (eg china’s coal ban) War 7 Government Interventions: Change in level of govt assistance (subsidies) Govt disincentives (excise (not income) taxes) Increase/decrease in company tax rates Costs of complying with government laws and regulations Change on tariffs (taxes on imports/exports) Trade agreements between nations

Answer 27

List the non-price factors that shift Demand Change in preferences Change in incomes Change in population/demographics Change in consumer confidence Change in relative price of substitutes & complements

Answer 28

List the non-price factors that shift Supply Change in cost of production (and thus profitability) Change in innovation (and thus productive efficiency Change in climatic conditions (natural disasters) Change in environment (ecosystem)

Answer 29

EQUILIBRIUM PRICE Equilibrium price: the price where: the total quantity demanded is equal to the total quantity supplied. i.e Where the demand and supply curves intersect There is no supply shortage or surplus of goods and services at this price point

Answer 30

CHANGES TO EQUILIBRIUM The Equilibrium price changes when the conditions affecting demanders (consumers) and suppliers (producers) change The demand and/or supply lines will shift or move in response. Market prices and quantities will move up and down in response to restore the equilibrium Equilibrium = market is at state of rest. Market is "cleared" Disequilibrium = market changes due to the non-price factors affecting both curves Where prices are at disequilibrium: If Excess demand > supply, resulting in supply shortage If Demand < excess supply, resulting in supply surplus

Answer 31

HOW DOES IT WORK: DEMAND DRIVEN Increase in Demand effect on equilibrium Decrease in Demand effect on equilibrium Increase in QUANTITY demanded caused by a non-price factor will create a shortage in the market. The price will rise until the shortage is cleared through increasing supply and falling demand Result: Higher prices, higher quantity Decrease in QUANTITY demanded caused by a non-price factor will create a surplus in the market. The price will fall until the surplus is cleared through reducing supply and rising demand Result: Lower prices, lower quantity

Answer 32

HIGHER DEMAND IMPACT ON EQUILIBRIUM In the graph, the demand curve has shifted to the right from D1 to D2 [1], because [non-price factor] resulting in an increase in quantity demanded at each and every price level, while supply has remained constant. The initial increase in demand creates a shortage at the original price (P1), where quantity demanded is greater than quantity supplied. [2] The shortage puts upward pressure on prices at each and every quantity level. [3] As the price increases, this sends a signal to suppliers that profit maximisation opportunities exist from increased production and to thus reallocate resources into it. As a result, supply expands [4] (movement along the supply curve). At the same time, as consumers are less willing or able to purchase the product at a higher price, demand contracts [5] (movement along the demand curve). The market adjusts from Equilibrium price (E1) to a higher Equilibrium price (E2) (from P1 to P2) [6], with an increased quantity of goods and services (from Q1 to Q2) [7], as a result of the [non-price factor].

Answer 33

LOWER DEMAND IMPACT ON EQUILIBRIUM In the graph, the demand curve has shifted to the left from DI to D2 [1], because [non-price factor], resulting in a decrease in quantity demanded at each and every price level, while supply has remained constant. The initial decrease in demand creates a surplus at the original price (PI), where quantity supplied is greater than quantity demanded. [2] The surplus puts downward pressure on prices at each and every quantity level. [3] As the price decreases, this sends a signal to suppliers that production is not as profitable as it once was and to reallocate resources into other areas. As a result, supply contracts [4] (movement along the supply curve) At the same time, as consumers are more willing or able to purchase the product at the lower price, demand expands [5] (movement along the demand curve). The market adjusts from Equilibrium price (E1) to a lower Equilibrium price (E2) (from P1 to P3) [6] with a decreased quantity of goods and services (from Q1 to Q2) [7], as a result of the [non-price factor].

Answer 34

HOW DOES IT WORK: SUPPLY DRIVEN Increase in Supply effect on equilibrium Decrease in Supply effect on equilibrium Increase in QUANTITY supplied caused by a non-price factor will create a surplus in the market. The price will fall until the surplus is cleared through reducing supply and rising demand Decrease in QUANTITY supplied caused by a non-price factor will create a shortage in the market. The price will rise until the shortage is cleared through increasing supply and falling demand

Answer 35

HIGHER SUPPLY IMPACT ON EQUILIBRIUM In the graph, the supply curve has shifted to the right from SI to S2 [1], because [non-price factor], resulting in an increase in the quantity supplied at each and every price level, while demand has remained constant. The initial increase in supply creates a surplus at the original price (PI), where quantity supplied is greater than quantity demanded. [2] The surplus puts downward pressure on prices at each and every quantity level. [3] As the price decreases, this sends a signal to suppliers that production is not as profitable as it once was and to reallocate resources into other areas. As a result, supply contracts [4] (movement along the supply curve) At the same time, as consumers are more willing or able to purchase the product at the lower price, demand expands [5] (movement along the demand curve). The market adjusts from Equilibrium price (E1) to a lower Equilibrium price (E2) (from P1 to P3) [6] with a increased quantity of goods and services (from Q1 to Q2) [7], as a result of the [non-price factor].

Answer 36

LOWER SUPPLY IMPACT ON EQUILIBRIUM In the graph, the supply curve has shifted to the left from SI to S2 [1], because [non-price factor], resulting in a decrease in the quantity supplied at each and every price level, while demand has remained constant. The initial decrease in supply creates a shortage at the original price (PI), where quantity demanded is greater than quantity supplied. [2] The shortage puts upward pressure on prices at each and every quantity level. [3] As the price increases, this sends a signal to suppliers that profit maximisation opportunities exist from increased production and to thus reallocate resources into it. As a result, supply expands [4] (movement along the supply curve). At the same time, as consumers are less willing or able to purchase the product at a higher price, demand contracts [5] (movement along the demand curve). The market adjusts from Equilibrium price (E1) to a higher Equilibrium price (E2) (from P1 to P2) [6], with a decreased quantity of goods and services (from Q1 to Q2) [7], as a result of the [non-price factor].

Answer 37

RESOURCE ALLOCATION AND RELATIVE PRICES Producers will be more willing to produce/supply products that are high in demand (and thus reallocate resources to it). Because it is more profitable this way due to increased quantity demanded and the upward pressure on prices due to demand increase. (Can sell more and at higher prices) Consumers will be more willing to buy/demand products that are lower in price Because they can get more value when meeting needs and wants. (Can buy more at lower prices) Changes in prices of products will therefore change incentives for consumers and producers on what they choose to buy/supply usually.. ..which will change the types of goods/services that are produced or consumed.

Answer 38

The value of a good or service is determined by consumers willingness to pay relative to availability Relative price is the price of one good/service in terms of another There are two types of goods affected by relative price: complementary and substitute goods

Answer 39

Substitutes one product with another cheaper alternative with similar functions or meets similar needs/wants. This usually ends up with the substitute product also changing its price.

Answer 40

SUBSTITUTE EXAMPLES Pepsi and Coca-Cola McDonalds and Burger King PlayStation and Xbox Supermarket-branded and Branded products Transport by Car or Train iPhone and Samsung Galaxy Pizza Hut and Domino’s Physical Books and Kindle

Answer 41

COMPLEMENTS A change in pricing in one product may influence changes to pricing in another product that is usually used together, goes along with or is associated with the product. This usually ends up with the complement product also changing its price.

Answer 42

COMPLEMENT EXAMPLES Tennis Balls and Tennis Racket Mobile Phones and Sim Cards Petrol and Cars Burger and Burger Buns PlayStation and Games Movies and Popcorn Shoes and Insoles Pencils and Notebooks

Answer 43

HOW THE PRICE SYSTEM HELPS ANSWER THE 3 BIG ECO QUESTIONS Due to relative scarcity, we have to make decisions on the resources available and the information at hand Relative price signals help with this. Over a period of time, the relative prices of each good or service change due to new non-price conditions affecting the level of demand and/or level of supply. In turn, changes in relative prices cause price signals that act as incentives or disincentives for decision makers. Profitability = The level or degree of how much an activity or process can make a profit

Answer 44

WHAT AND HOW MUCH TO PRODUCE? Producers opt to produce what is are relatively most profitable and wanted by consumers. Example: Imagine that the equilibrium market price of ice-cream increased relative to that for yoghurt due to an increase in consumer demand for ice-cream (due to non-price factors like successful advertising, population growth, etc.) Meanwhile the demand for yoghurt fell (due to a non-price factor like a health scare). Ice-cream would most likely be relatively more profitable than yoghurt. Higher profitability in ice-cream would act as a positive incentive, attracting extra resources into this area of production, while perhaps pulling resources away from yoghurt.

Answer 45

WHAT AND HOW MUCH TO PRODUCE? Issues May cause more production of socially undesirable yet profitable goods and services (e.g. illegal drugs, pollution, guns and prostitution) (Market failure), May cause under-production of lower priced, unprofitable or socially desirable goods and services (e.g. affordable healthcare, education and housing). Government intervention may be needed in these situations Laws/regulations Taxes/subsidies Incentives/disincentives

Answer 46

HOW TO PRODUCE? To maximise profits, producers usually seek to minimise production costs and maximise efficiency. Example: Producers would prefer to produce a pair of jeans using labour resources if it is cheaper than using capital equipment like laser-operated machines. The market-based system involving demand and supply would provide the necessary price information as to which production method is the cheapest to use. Labour might be cheaper in this example due to its supply being high relative to demand.

Answer 47

HOW TO PRODUCE? Issues May encourage cheap production methods that could risk the wellbeing, health and safety of workers and the general community. For example, cutting costs via having dangerous working conditions or releasing pollution. Government intervention may be needed in these situations Laws/regulations Taxes/subsidies Incentives/disincentives

Answer 48

FOR WHOM TO PRODUCE? More incomes = more purchasing power = ability to buy more goods and services. Individuals who earn higher incomes by selling their scarcer resources (eg; skills) can purchase more goods and services than those on lower incomes. For example, high wages and incomes earned by skilled surgeons, successful entrepreneurs and well-known pop stars and sportspersons, who can sell scarce resources where there is a shortage and their supply is low relative to demand.

Answer 49

FOR WHOM TO PRODUCE? Issues May lead to extreme income inequality and poverty, which lowers average living standards. Government intervention may be needed in these situations Laws/regulations Progressive Taxes/subsidies Incentives/disincentives

Answer 50

COFFEE CASE STUDY ACTIVITY Description Market structure/power Competitors (number, brands) Demand Who/where/how are the buyers? What non-price factors affect demand Draw a D-S curve that shows the effect of one of the non-price factors on demand to the market equilibrium Supply Who/where/how are the suppliers? What non-price factors affect supply Draw a D-S curve that shows the effect of one of the non-price factors on supply to the market equilibrium Effects How do price changes affect decisions made based on the 3 big Eco questions (what and how much, how, for who)

Decision Making in Markets Flashcards

(74 cards)