yr 11 eco - topic 3 markets

market

situation where buyers and sellers are in contact with each other for the purpose of exchange

types of markets:

• g.a.s market

• factor markets — market for resources

examples of factor markets

labour market, capital market

equilibrium

refers to a situation where at a certain price, the quantity demanded and the quantity supplied are equal

market equilibrium

when demand and supply are in equilibrium so that there is no tendency for the price of quantity demanded or supplied to change

demand

The quantity of a particular good or service that consumers are willing and able to purchase at various price levels at a given point in time

factors affecting demand

• price of good or service

• price of substitutes/complements

• expected future prices

• changes in consumer tastes and preferences

• technological progress

• income levels

• size of population

• age

• behaviour of other consumers

supply

the quantity of a good or service that all firms in a particular industry are willing and able to offer for sale at different price levels, at a given point in time

explain how the factor affects supply: price of good or service itself

influences the producer’s ability and willingness to supply it

explain how the factor affects supply: future expectations about price

if supplier believe price will rise in future, they are likely to increase production to meet an expected increase in demand, as this would likely lead to higher profits

explain how the factor affects supply: changes in the costs of factors of production

falls in cost of factors of production would allow firms to supply more of a particular good, and vice versa

other factors affecting supply

• fall in cost of factors of production

• improvement in technology used in production process

• The price of other goods or services

• The quantity of the good available

• Climate and seasonal influence

supply schedule

Quantity of a good that will be supplied over a range of prices at a given point in time

law of supply

As the price of a certain product rises, the quantity supplied by producers will rise

increase in supply

firms are willing and able to supply more of a product at each price level than before

• i.e if supply increases, it means firms can now supply more of the good at the same price

  • and they can produce a given quantity at a lower price than before

decrease in supply

firms are willing and able to supply less of a good at each price level than before

• i.e it costs more to supply a given quantity than before

price elasticity of supply

responsiveness of quantity supplied of a product to changes in price

relatively elastic supply

rise in quantity supplied proportionately greater than the increase in price

relatively inelastic supply

less than proportionate change in quantity supplied

unit elastic supply

if quantity supplied rises by the same proportion as price increase

perfectly elastic supply

suppliers supply infinite amount of good at that price, below that price they wouldn’t be willing

perfectly inelastic supply

quantity supplied remains the same regardless of price

factors affecting price elasticity: time lags after price change

• immediately after price change, supply would be perfectly inelastic as producers cannot increase inputs

• short term: elasticity increases, though likely to be relatively inelastic

• long term: producers increase inputs → increased production → supply relatively elastic

other factors affecting price elasticity

• ability to hold + store stock

  • easier it is to hold stock, more elastic the supply

• excess capacity

  • supply will be more elastic as they can respond more quickly to price increases

price elasticity of demand

a measure of the responsiveness of quantity demanded to a change in price

relatively elastic demand

A strong response to a change in price: if price changes, consumer behaviour changes

relatively inelastic demand

A weak response to a price change: if price changes, consumer behaviour changes

unit elastic demand

a proportional response to a price change

perfectly elastic demand

demand is infinite; if price rises, demand falls to 0

perfectly inelastic demand

no matter how much the price changes the quantity demanded remains constant

total outlay method

price x quantity

total outlay method - inelastic demand (which way does price and total outlay move?)

price and outlay move in the same direction

i.e if price goes up, total outlay goes up

• e.g fuel - even if prices go up people still need it so demand is less responsive

total outlay method - elastic demand (which way does price and total outlay move?)

price and total outlay move in opposite directions

i.e if prices increase, total outlay decreases

e.g travel - if prices go up, people are less likely to go

total outlay method - unit elastic demand (which way does price and total outlay move?)

• price changes but total outlay remains the same

• price and quantity can change but they change in the same proportion so total revenue is the same

factors affecting elasticity of demand: necessities vs luxuries

• necessities are inelastic bc consumers need to buy it regardless of price - e.g fuel

• luxury is elastic - can be forgone if prices increase

factors affecting elasticity of demand: products and many vs no substitutes

• many substitutes - elastic because there are many other options when prices of original good rise

• no substitutes - inelastic because you can’t switch

factors affecting elasticity of demand: length of time since a price change - short term + long term

short term

• inelastic - takes time for people to notice price changes and find alternatives

long term

• elastic - people find cheaper habits/different cheaper brands so demand is more responsive

steps for movement to a new equilibrium in price

1. non-price factor changes

2. demand/supply curve shifts

3. market disequilibrium (surplus/shortage)

4. price rises/falls to adjust

5. expansion/contraction occurs

6. new equilibrium

monopoly: characteristics

• one firm selling product - no competition

• no close substitutes for product

• significant barriers to entry

• monopolist has great control over market price

• e.g public transport, water supply

monopolistic competition: characteristics

• large no. of small firms

• similar products; firms engage in product differentiation

• small barriers to entry

• advertising plays an important role in attracting + maintaining customers

• e.g restaurants, hairdressers

oligopoly characteristics

• only a few relatively large firms, each of which occupy a significant share of the market

• sell similar for differentiated products

• extremely high barriers to entry

• oligopolist firm constantly monitors behaviour of other rival firms

• e.g banks, supermarkets

market failure

occurs when the price mechanism takes into account private benefits and cost of production to consumers and producers,

but fails to account for indirect costs,

such as damage to the environment

how does the government use price floors to intervene in the price mechanism?

price floors → minimum price

e.g minimum wage → guarantees fair wages in labour market

how does the government use price ceilings to intervene in the price mechanism?

price ceiling → maximum price

e.g PBS → sets a maximum limit on what pharmacies can charge people for prescription meds → helps lower income earners have access to cheaper medicine

how does the government intervene in the price mechanism using the provision of public goods (quantity intervention)?

government provides goods that the market fails to provide (public goods)

e.g parks, defense, transport

how does the government intervene in the price mechanism using subsidies (quantity intervention)?

subsidies - cash payments from the government to businesses to encourage production of a g.a.s and influence allocation of resources in an economy

e.g solar panels, EVs

positive externality

unintended positive outcome of an economic activity whose value is not reflected in the operation of the price mechanism

negative externality

unintended negative outcome of an economic activity whose cost is not reflected in the operation of the price mechanism

e.g environmental impacts - such as pollution

merit goods

g.a.s that are not produced in sufficient quantity by the private sector because individuals do not place significant value in them

e.g government subsidies for arts (theatre), education

demerit goods

items that bring harm to the community

e.g tobacco, alcohol

public goods

goods that private firms are unwilling to supply, as they aren’t able to restrict usage and benefits to those willing to pay for the good

as a result governments provides these

e.g parks