economics area of study two test

supply

Amount of goods a company is willing to make and sell

demand

Amount of goods consumers are willing and able to buy

surplus

Supply is greater than demand

shortage

Demand is greater than supply

equilibrium

Supply and demand are equal

the law of demand

As the price of a product increases, the total quantity demanded decreases

As the price of a product decreases, the total quantity demanded increases

Law of supply

As the price of a product increases, supply increases

As the price of a product decreases, supply decrease

the law of supply in action
consumers start paying for cupcakes instead of donuts, what output does the bakeries increase

bakeries increase the output of cupcakes and reduce the output for donuts

Ceteris paribus

everything else stays the same

market forces

Interaction of demand and supply determines market prices.

relative prices

The price of one good or service compared to another, indicating its relative scarcity.

what do higher prices indicate

greater scarcity or stronger demand, attracting more resources to production.

what do lower prices indicate

less scarcity or weaker demand, leading to a reallocation of resources.

what and how much to produce by the market

Firms allocate resources based on profitability.

Market Failure in Allocation for what and how to produce

Socially undesirable but profitable goods may be overproduced.

Socially desirable but unprofitable goods may be underproduced.

government intervention for what and how much to produce

taxes or subsidies can correct resource allocation

how to produce by the market

Firms seek to minimise production costs to maximise profits.

The method of production depends on the relative price of labour vs. capital (use which is cheaper)

Market Failure in how to produce?

Cost-cutting measures may lead to unsafe working conditions or environmental damage.

for whom to produce by the market

The distribution of goods and services depends on income levels

Market Failure in Income Distribution (whom to produce)

create income inequality and poverty, lowering living standards.

government intervention for whom to produce

progressive taxation, welfare payments can redistribute income.

government intervention for how to produce

occupational health & safety laws

four main types of market structure

• Pure competition (prefer for consumers)

• Monopolistic competition (most popular)

• Oligopoly

• Pure monopoly (bad for consumers)

pure competition

• many buyers and sellers trading a homogeneous product

• where no firm has the power to set prices

• all are considered price takers.

• trong competition

• perfect knowledge of market conditions

• no brand differentiation

• easy entry and exit due to low barriers like minimal start-up costs or regulation.

Monopolistic competition

• many sellers offer products that are differentiated by branding or quality and are not perfect substitutes.

• While there is free entry and exit in this market, firms compete through product differentiation rather than price alone

• allowing for a range of consumer choices.

Oligopoly

• small number of large firms dominate the majority of market share

• While there is still competition

• the potential for collusion exists—where firms may cooperate to raise prices

Monopoly

• Single firm is the sole provider of a particular good or service.

• As price makers with no competition, monopolies can set higher prices, leaving consumers with no alternative choices.

how does changes in disposable income impact demand

income available for spending after receiving welfare and paying income tax rises than demand will increase as people will have more available money.

how does price of substitutes impact demand

If substitutes become cheaper, the demand for the other product decreases as people switch between products

how does complementary goods impact demand

when the price of one complimentary item falls, the demand for the other complementary good is likely to rise

how does tastes and preferences impact demand

positive change in tastes demand will increase
negative change in taste demand will decrease

how does interest rates impact demand

when interest rates are lower and borrowing is cheaper, demand will be high, however when interest rates are higher, demand of most goods and services will lower

how does population impact demand

a rise in population perhaps due to birth rates will increase the quantity of goods or services produced

consumer confidence impact demand

when households are feeling confident or optimistic they often purchase or demand more goods and services. In contrast if consumers are pessimism about the future is often reflected in a decrease in demand.

onset of summer and winter impacting demand

In summer, the demand for some products at a given price increases (ice cream, surfboards)

Furthermore, the onset of winter might see a rise in the demand for other types of goods or services at a given pice (snow skis, woollen jumpers)

more fashionable and trendy impacting demand

Over time, some goods and services become more fashionable, perhaps as a result of new technology and slick advertising (eg the latest iPhone). Increases the quantity of most goods or services at a given price

changes in costs of production impacting supply

an increase in the costs of production decreases supply, as it reduces profitability and discourages production.

technology impacting supply

the use of improved technology like automated warehouses, robotics on an assembly line oftens lifts efficiency, cutting unit production cost, increasing their supply at any given price.

productivity impacting supply

a rise in efficiency/productivity of workers or other resources used will increase supply

climatic conditions impacting supply

climate conditions affect farmers supplying crrops. Favourable weather conditions means that the more output per hectare can be produced, at lower unit costs (increase supply)

An increase in government assistance to business and lower tax rates impacting supply

Governments provide financial assistance to businesses operating in some manufacturing industries, along with funding for private schools and hospitals.

This helps to cover some costs and makes firms more profitable, thereby increasing the supply of these goods or services at a given price.

Additionally, lower taxes may encourage more supply.

what is market power

a company's ability to manipulate the price of an item in the marketplace by manipulating the level of supply, demand, or both

does scarcity have a huge role in pricing power

yes, in situations like the mcg and the airport, they can increase the price as consumers have no other choice

The advantages of market power

• Higher profits

• Economies of scale

• Improved brand recognition

• Strategic decision making

• Investment in research and development