Economics — Topic 3 (Markets)

Nuzzling nekooooo

supply

The amount of G and S that producers are willing to offer for sale at various prices

• Reflects the cost of the resources used in production and the return/profits required

• Supply levels determine the allocation of an economy's scarce resources

demand

The quantities of goods or service demanded for purchase at particular prices at a particular time

• The amount consumers desire to purchase at various alternative prices

• Reflects the degree of value consumers place on items (utility)

• Deemed to be effective demand, demand by consumers who are willing and able to buy the good or service

market

Any place or platform that brings buyers and sellers together with a view to agreeing a price

• Consists of consumers and producersThis is the

• basis of how the market economy operates, through prod and exch. of G and S

  • Buyers create demand

  • Sellers create supply

goods markets

Supply and demand of tangible goods

• Product markets

  • Food, houses, clothing

services markets

Supply and demand of intangible goods

• Healthcare, financial, law

factor markets

Deal with the supply and demand of the factors of production (CELL)

organised resources markets

Commodities 

• Rubber, oil, sugar, wheat, gold, copper, etc

• Factor markets

Capital (financial markets)

Shares, bonds, financial instruments (factor market)

Market equilibrium

Where demand equals supply at equilibrium price

Effective demand

Willing and able to pay

individual demand

Demand for a G or S by an individual

Market demand

consists of the sum of all individual demand schedules in the market

Price elasticity of demand

The level of responsiveness of consumer demand to a change in price. It is just a number and is independent of any units of measurement although it is often negative. It is expressed as a positive

• This is important as firms can use the price elasticity of demand to forecast the demand of different pricing strategies

Inelastic

• Demand does not drop as much relative to rises in price elasticity

• Total revenue is directly proportional to a change in price

  • Typically these are items and things required for life, such as food, water or important medicine

• Companies can increase prices without losing many sales, raking in a bigger revenue

Elastic

• Demand rises relative to a drop in price

• Total revenue is inversely proportional to a change in price

• If we want to make money, we want the demand curve to be elastic

• Companies can gain sales just be making a small cut in price

Total revenue

Price times quantity demanded

Total revenue - total costs = total profit

Total outlay method

Elasticity = change in price / change in revenue

Unit elastic

When total revenue is static in relation to to a change in price

Law of supply

Price is proportional to quantity supplied

Effective supply

Level of supply of what firms are willing and able to supply

Market supply

Total sum of all supply schedules in an industry

Producer surplus

The area below the supply curve over the market price INSERT DIAGRAM

shortage

When there is a greater consumer demand than supply available

• When there are households willing to pay more, the price of the good will start to rise as firms aim to maximise profit, also related to the scarcity of resources

  • Because some consumers are willing to pay more, but some don’t so demand contracts

• The economy will move to equilibrium by itself

Free market

Where buyers and producers dictate the market with no government intervention

• Producers in this industry are generally excellent in producing private goods

• The government may only intervene to ensure all members of society have equal access

Market period

The only thing that moves is the demand curve, the price does not have a chance to move

Market failure

occurs when the equilibrium price or the equilibrium quantity is considered to be inappropriate for the economy

• The markets do not produce the desired outcome or costs and benefits of production are not reflected by the supply and demand curve

  • When the equilibrium price is too high for an important drug, the government may interfere to force a lower price on sellers

shortage

when demand is greater than supply

• The price will start to rise

• Some consumers are still prepared to pay more but some don’t so demand contracts

command/planned economy

where the government has full authority of the market

market failure

occurs when the equilibrium price or quantity is considered to be inappropriate for the economy

• Markets do not produce the desired outcome or costs

• The benefits of production are not reflected by the supply and demand curves

oligopoly

market structure where a small number of firms dominate and control a significant portion of the market

• Tend to make supernormal profits through high prives and do not have incentives to innovate or to achieve high rates of efficiencies

  • Requires regulation

monopoly

market structure where a single firm dominates the supply of a specific portion of the market

• Transport NSW

• Tend to make supernormal profits through high prives and do not have incentives to innovate or to achieve high rates of efficiencies

  • Requires regulation

duopoly

market structure where two companies dominate the sale of a product or service to a large number of consumers

• Coles and Woolworths

monopolistic competition

a market structure where a single seller or producer provides a unique product or service with no close substitutes

fungible

replacable by another identical item; mutually interchangable

homogeneities

the quality or state of being a similar kind or having a uniform structure or composition throughout

collusion

a secret or illegal operation or agreement between two or more parties to decieve or defraud others, often for a dishonest or illegal purpose

private good

a G or S that is RIVAL and EXCLUDABLE

• Direct payment from the unique consumer to the producer

  • Firms specialise in these products and are happy to provide for a profit

pure public goods

A G or S that is non rival and nonexcludable, there is no direct payment from consumer to producer

• Non-excludable: No one can be denied access to the good because of cost

• Non rival: One person’s consumption does not affect the ability for others to consume it

  • National defence, police force, emergency services

impure public goods

A G or S that is rival and excludable but not profitable to provide to all

• Education

• Government intervention as there is a market failure of supply

• Profitable in limited circumstances

excludable

Those who do not pay for the good are prevented from consuming the good

• Non purchasers cannot gain the benefits without enforcable property rights

rival

if one person consumes the good, then the ability for the others is diminished

• Digital goods; ppl can just download and share to eachother

enforceable property rights

free rider

individual, household or firm that benefits from a G or S without contributing to its funding, or by consuming more than they are entitled

externalities

factors where benefits are not reflected in the market price of G and S

• Social costs and benefits

positive externalities

Beneficial for everyone, gain in the welfare of one party resulting in the activity of another party without there being any compensation for the losing party

• Social benefit

negative externalities

Negative for everyone,

• Loss in the welfare of one party resulting from the activity of another party without there being any compensation for the losing party

demerit good

A G or S whose consumption is generally considered unhealthy, degrading or socially undesirable due to the negative effects on consumers themselves

black market

the goods are not illegal, but it is illegal to bring them in without paying taxes

• Government doesn’t have knowledge of the items

• Breaking laws

Role of prices

Allocating resources by producers to achieve highest profit
Rationing to enable market to clear, removing shortages and surpluses
Incentivising producers to take risks to cater to consumer demand
Scarcity as reflective of relative scarcity of supply of G and S

Equilibriating supply and demand in the market place

Perfectly inelastic

The value is 0

General method for elasticity

% change in QD / % change in price

• E > 1, demand is elastic

• E < 1, demand is inelastic

• E = 1, demand is unit elastic

Types of elasticity related to diff types of products

• Goods w close substitutes will have elastic demand curves

• Necessities tend to have inelastic demand curves

• Luxuries tend to have elastic curves

market structure

Determined by

• Number of firms in the industry

  • Nature of the product produced

  • Degree of each firm’s power

  • Degree to which the firm may influence price

  • Profit lebels

  • Firm’s behaviour

• Impact on efficiency and achieving EOS

• Extent of barriers to entry

• Microeconomic models

  • Important as the degree of competition affects the consumer

perfect competition

• Large number of firms

• Products are homogenous and the consumer has no reason to express a preference for any firms

• Freedom of entry and exit into and out of the industry

• Firms are PRICE TAKERS and have no control over the price they charge for their product

• Each producer supplies a very small proportion of the total industry output

• Consumer and producers have perfect knowledge about the market

  • Agriculture

advantages of perfect competition

• High degree of competition encourages us to allocate resources to most efficient use

• Price = marginal costs

• Normal profit in the long run

• Firms operate at maximum efficiency to stay in the industry

• Consumers benefit from low prices

monopsony

Situation where there is only one buyer in the market place

types of government intervention

• Price ceiling (price control) the highest price that the firm can set

• Price floor (the lowest price that the firm can set)

• Sales tax: Prices on things whcih aren’t good for people