topic 3

Question 1

Definition: Law of Demand

Answer 1

price and quantity demand have an inverse relationship because of the Law of Marginal Utility

Question 2

Definition: Law of Diminishing Marginal Utility

Answer 2

utility as you consume more units of a specific G&S decreases therefore only lower prices will entice customers to consume more

Question 3

Definition: Quantity Demand

Answer 3

the level of demand at a particular price

Question 4

Describe the theoretical Demand Curve of a normal good

Answer 4

X axis = price / Y axis = quantity demand
negative sloping curve

Question 5

Describe the movement of the Demand Curve

Answer 5

Movement ALONG the demand curve is due to a change in price (moving up is a contraction as price goes up / down is an expansion as price goes down)
Movement OF the demand curve is due a change in anything BUT price (shifting right is an increase / shifting left is a decrease)

Question 6

What are the factors affecting market demand?

Answer 6

• population size
• demographic
• distribution of income
• consumer expectations for future prices

Question 7

Describe the movement of a substitutes’ demand curve?

Answer 7

if income decreases, the DC shifts right
if income increases, the DC shifts left

Question 8

Describe the movement of a compliment’s demand curve?

Answer 8

if income decreases, the DC shifts left
in income increases, the DC shifts right

Question 9

Definition: Consumer Surplus

Answer 9

a measure of the utility that people gain from consuming G&S under the price mechanism (surplus of utility firms aim to get rid of using price differentiation)

Question 10

Definition: Derived demand

Answer 10

the demand for the FOP/factor markets due to the demand for final G&S

Question 11

Definition: Supply

Answer 11

the quantity of a good or service producers are willing to supply for sale at a particular price at a particular time shown through the supply curve, a graphical representation of the relationship between price and quantity supplied

Question 12

What is the law of supply?

Answer 12

supply, profit and price have a positive/direct relationship (shown by the positive slope of the supply curve)

Question 13

What are the factors affecting supply?

Answer 13

1. price (of the specific G/S and the price of substitutes and compliments)
2. cost of FOP
3. technology changes
4. producers expectations about the market
5. producers preferences
6. monopoly vs competition
7. seasonal changes
8. increase/decrease in productivity

Question 14

Movement along the supply curve?

Answer 14

contraction/expansion due a change in price

Question 15

Movement of the supply curve?

Answer 15

increase/decrease due to a change in anything BUT price

Question 16

Definition: Producer surplus

Answer 16

difference between the price a producer sells the G/S for and its marginal cost (below the price and above the demand curve)

Question 17

Definition: market equilibrium

Answer 17

where the demand curve and supply curve intercept (demand = supply)

Question 18

Definition: Price mechanism

Answer 18

process by which decision about selling prices and production quantities are determined supply and demand curve equilibrium

Question 19

What the roles of price?

Answer 19

Allocating resources so producers recieve max profit
Rationing to remove surplus and shortage
Incentivising producers to take risks and satisfy N/S
Scarcity - solve the problem of scarcity
Equilibrating supply and demand in markets

Question 20

What are the motives for spending?

Answer 20

1. speculatory
2. precautionary
3. transitionary

Question 21

Demand decreases ____

Answer 21

price decreases and quantity supplied decreases (surplus)

Question 22

Demand increases ____

Answer 22

price increases and quantity supplied increases (shortage)

Question 23

Supply decreases ____

Answer 23

price increases and quantity supplied decreases (shortage)

Question 24

Supply increases ___

Answer 24

price decreases and quantity supplied increases (surplus)

Question 25

What does Elasticity of Demand do?

Answer 25

describes the degree of consumer responsiveness to a change in price

Question 26

What is an inelastic demand curve?

Answer 26

If price rises by x% and quantity demand falls by >x% Inelastic = (< 1) Perfectly Inelastic = 0 - many substitutes and is a luxury - increases consumer surplus

Question 27

What is an elastic demand curve?

Answer 27

If price rises by x% and quantity demand falls by >x% Elastic = (> 1) Perfectly Elastic = infinity - is a luxury - decreases consumer surplus

Question 28

What is a unit elastic demand curve?

Answer 28

If price rises by x% and quantity demand falls by x% Unit elastic = 1

Question 29

What is the Total Revenue Method?

Answer 29

- INELASTIC if total revenue moves same to price - ELASTIC if total revenue moves opposite to price - UNIT ELASTIC if total revenue is static while price changes

Question 30

What is the general method?

Answer 30

= % of change in quantity demand / % of change in price

Question 31

What are private goods?

Answer 31

A good or service that is rival (if someone consumes the good, the availability for others is diminished) and excludable (those who don't pay for the good don't consume it) There is a direct payment from consumer to producer Has inforcable property rights and sold by firms for profit

Question 32

What are (pure) public goods?

Answer 32

A good and service that is non rival and non excludable There is no direct payment No inforcable property rights and provided by government (e.g national defence)

Question 33

What are (impure) public goods?

Answer 33

Public goods with privatisation provision that are rival and excludable but not profitable to all

Question 34

What are Merit goods?

Answer 34

are rival and excludable but not provided by free markets so the government provides or subsides because they have positive externalities (benefits both consumer and society's members) e.g opera, libraries

Question 35

What are Demerit goods?

Answer 35

G&S whose consumption is considered unhealthy because of negative externalities (harms both consumer and society's members)

Question 36

What is market failure?

Answer 36

it occurs when the market is at equilibrium but when markets don't produce desired outcomes meaning equilibrium price or quantity is considered inappropriate. 4 types: - price too high --> price ceiling - price too low --> price floor - quantity too high --> sales tax - quantity too low --> sales subsidies

Question 37

What is a price ceiling?

Answer 37

occurs when price is deemed too high at market equilibrium by the government so they implement a price ceiling or max price below normal equilibrium to protect consumers from over pricing consequences - shortages and black markets

Question 38

What is a price floor?

Answer 38

occurs when price is deemed too low at market equilibrium by the government so they implement a price floor or min price above normal equilibrium to protect producers from going bankrupt consequences - surplus, govt has to buy surplus

Question 39

What is a sales tax?

Answer 39

occurs when the quantity produced of a good (with negative externalities) is deemed too high by gov so they tax the good supply curve moves left (vertical distance of tax), price increases and demand decreases, cost of production increases and supply decrease (inelasticity increases, consumer tax portion increases)

Question 40

What are sales subsidies?

Answer 40

occurs when the quantity produced of a good (with positive externalities) is deemed too low by gov so they subsidise the good supply curve moves right (vertical distance of subsidy), price decreases and demand increases, cost of production decreases and supply increases

Question 41

What is market structure?

Answer 41

identifies how a market for goods and services is made from different factors: - KEY INDICATOR: number and size of firms that make up the industry - KEY CAUSE: nature of the product (e.g products with less substitutes are more expensive so less companies produce them) - KEY CAUSE: Freedom of entry and exit from the industry (aka Barriers to Entry).​ - IMPACTS: Control over price, factors of production and output.​

Question 42

What is the market structure spectrum?

Answer 42

PERFECT COMPETITION MONOPOLISTIC COMPETITION ALIGOPOLY - 3-4 firms DUOPOLY - 2 firms MONOPOLY - less competitive - higher prices - less innovation - need to regulate

Question 43

Characteristics of Perfect Competition

Answer 43

- larger number of firms - less imperfections - lower prices (firm has no control over price, are PRICE TAKERS) - more innovation - no need to regulate - products are homogenous (lots of substitutes) - easy barrier to entery - e. g closest is agriculture

Question 44

Characteristics of Monopolistic Competition

Answer 44

- majority with 40-50 firms - most common - due to imperfections and product differentiation (advertised by advertising and loyalties) they have some control over price - barriers to enter relatively easy

Question 45

Oligopoly

Question 45

Characteristics of Oligopoly/Duopoly

Answer 45

- few firms (3-4) - PRICE MAKERS - potential for collusion (illegal activity where firms work together to decrease supply and increase demand and increase price in an inelastic demand) - interdependence of firms (similar behaviour)

Question 46

Characteristics of Pure Monopoly

Answer 46

where one producer dominates the industry. rare because when firms reach 25% market share the ACCC investigates them - origins (growth of firm EOS, amalgamation - buy out competition, nationalisation by gov, natural monopoly bc of product) - increased price (eat into consumer surplus) - less efficient - less choice - dead weight loss