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1

Define market

a group of buyers and sellers of a particular good or service

2

Define competitive market

A market in which there are many buyers and sellers so that each has little impact on the market price (price takers)

3

Define the law of demand

all things being equal - the quantity demanded of a good falls as the price of the good rises

4

what is 'collective action'

Private sacrifice for the greater common good
e.g. tackling climate change

5

what is strategic intervention

Private and public goods e.g. cooperative and uncooperative outcomes

6

Define demand schedule

A table that shows the relationship between price of a good and the quantity demanded

Demand curve = relationship between price and quantity demanded

7

Define normal good

An increase in income leads to an increase in quantity demanded

8

Define inferior good

An increase in income leader to a decrease in quantity demanded

9

Define substitutes

two goods for which a decrease in the price of one good leads to a decrease in demand for the other good

e.g. ferrari sale = less demand for mclaren

10

Define complements

(e.g. tv and dvds)

Two goods for which a decrease in the price of one good leads o an increase in demand for the other

11

Mechanisms for allocating scare resources

Markets
–Fixed prices, auctions, matching other than price

Hierarchies
–Central planners & Administrators

12

To reach the highest form of competition a market must:

1. Offer goods that are exactly the same (homogenous)
2. There are so many buyers and sellers that individuals do not influence the market price

13

Source of demand

• Survival (needs)
• Desire (wants)

Determinant of quantity demanded:
• Price of good (P)

14

Determinants of demand

• Price of substitutes and complements (shift)
• Income (movement along demand curve)
• Tastes and preferences (shift)
• Expectations (shift)
• Number of consumers (shift)

(TENPI)

15

differences between shifts and contractions

Movement ALONG a demand curve
•SHIFT in the demand curve

16

Source of supply

Individuals supply labour effort
–Businesses supply raw materials and finished products –Organisations supply services

17

Determinants of quantity supplied

• Determinants of Supply:
Price Of Related Commodity (Py)
• Factor Cost (w)
• Number Of Suppliers (Ns)
• Technology (Tech)
• Seller Expectations (Expects)

18

Define the law of supply

quantity supplied will increase as the price of the good rises

19

Define equilibrium price

The price that balances quantity supplied and quantity demanded

20

difference between surplus and shortage

Surplus = Situation in which quantity supplied is greater than quantity demanded

Shortage = Situation in which quantity demanded is greater than quantity supplied

*see diagram page 82 *

21

what do prices do

reflect scarcity

22

explain Pareto efficiency

can’t make any one person better off, without making someone else worse off
• Occurs when
Price = Marginal Benefit = Marginal Cost

23

Define welfare economics

Study of how the allocation resources effects economic wellbeing

24

Define consumer surplus

A buyers willingness to pay minus the amount the actually pays
• The area lying below the demand curve and above the equilibrium price
• What they think it’s worth – what they pay

willingness to pay = The maximum amount that a buyer will pay for a good

25

Define producer surplus

The amount a seller is paid for a good minus the sellers cost
• Area lying above the supply curve and below the equilibrium price

26

Factors affecting demand

1. Income
2. Price of related goods (substitutes + complements)
3. Tastes
4. Preferences
5. Number of buyers

27

what are sunk costs

Some costs are not included by economists, while they are included by non-economists. Costs are sunk when the expenditure has been completed and cannot be recovered. Sunk costs should be ignored in subsequent rational decisions. Sometimes some of the costs can be recovered but some are sunk, e.g. there may be some resale value