Transcript 7.1_revision_quiz - econbus

AS Economics
Module 1 revision
Have you bothered yet?
List 4 factors that cause a shift in
demand…
Price of substitutes
 Consumer tastes/ changes in fashion
 Consumer confidence ‘feel good factor’
 Consumer income
 Changes in the population
 Changes in legislation
 Advertising
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Show on a demand curve a
contraction in quantity demanded.
Draw a demand and supply curve
for housing, label the equilibrium
price as P1 and the quantity as Q1.
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Now show the effect of a rise in the cost
of land
an increase in disposable income.
Label the new equilibrium price as P2
and the quantity as Q2.
What is meant by the term joint
supply – provide an example.
Draw a consumer surplus diagram
– shade in the area.
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Explain what the consumer surplus
concept means to a seller….
List 4 factors that cause a shift in
supply…
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Changes in production costs
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Wages, raw materials and components, energy, rents, interest rates
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Government taxes and subsidies
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Changes in technology – ICT can reduce long term costs but are
expensive in SR
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Climatic conditions (important for agricultural supply)
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Changes in the number of producers in the market
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Changes in the objectives of suppliers in the market
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Changes in the prices of substitutes in production
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The profitability of alternative products (substitutes) or those with
joint supply (crude oil = petrol and paraffin and diesel)
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Expectation of future price changes
Equilibrium
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Draw a D & S diagram and show on it
excess demand and excess supply.
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Label market shortage and glut.
What does elasticity mean to
sellers?
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If product is elastic or inelastic?
If the product has more elastic PeD then the seller has to be
careful with increasing the price as consumers will substitute the
product with a cheaper alternative.
However, if the product has inelastic PeD– then the seller can
‘abuse’ the position and increase prices and gain more profits… if
they dare…. As it may signal for more suppliers to enter the
market to take advantage of the profit potentials.
Income elasticity - Which goods
have positive and which have
negative income elasticity?
 A positive
sign denotes a normal
good
 A negative
good
sign denotes an inferior
Significance of Income Elasticity of
Demand
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High Income Elasticity
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Demand is sensitive to changes in real incomes
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Demand is therefore cyclical – in an economic expansion,
demand will grow strongly. In a recession demand may fall
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Can be difficult for businesses to accurately forecast demand
and make capital investment decisions
Low Income Elasticity
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Demand is more stable during fluctuations in the economic cycle
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Over time, the share of consumer spending on inferior goods
and normal necessities tends to decline
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Long run – businesses need to invest in / focus on products with
a higher income elasticity of demand if they want to increase
total profits
PeS – what is the significance of an
elastic or inelastic S?
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Price elasticity of supply (Pes) measures the
relationship between change in quantity supplied
and a change in price.
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When supply is elastic, producers can
increase production without a rise in cost or
a time delay
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When supply is inelastic, firms find it hard to
change their production levels in a given
time period
What Determines Supply
Elasticity?
 Factor
substitution possibilities
 Spare production capacity available
 Stocks
(inventories) available to meet
demand
 The
time frame allowed
run (elastic supply))
 Artificial
limits on supply
(Short run (inelastic supply) Long
What does Cross elasticity
measure?
 Cross
price elasticity (CPed)
measures the responsiveness of
demand for good X following a
change in the price of good Y (a
related good)
CPeD shows substitutes and
complements… so which is which?
positive or negative?
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Substitutes: With substitute goods such as brands of
cereal an increase in the price of one good will lead to an
increase in demand for the rival product. Cross price
elasticity will be positive
Complements: With goods that are in complementary
demand when there is a fall in the price of e.g. DVD
players we expect to see more DVD players bought,
leading to an expansion in market demand for DVD
videos. The cross price elasticity of demand for two
complements is negative
Cobweb diagram
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Why does the govt intervene for
consumers and for producers in these
situations….?
BUFFER STOCKS - what is it?
Can you draw the diagram???
 And label clearly…
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Monopoly D diagram – do you
know what it means?
Monopolies use barriers to entry to
protect their position – what are
they?
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Patents - Patents are government enforced property rights to prevent the entry of
rivals. They are generally valid for 17-20 years and give the owner an exclusive right
to prevent others from using patented products, inventions, or processes.
Vertical Integration - Control over supplies and distribution can be important. For
example many major oil companies are fully vertically integrated. They control, oil
extraction refining and retail outlets maintain their market power.
Predatory Pricing - Firms may adopt predatory pricing policies by lowering prices
to a level that would force any new entrants to operate at a loss. A high profile case
came to a head in 1999 when the Office of Fair Trading found News International
guilty of adopting predatory pricing policies in a bid to reduce competition in the
market for broadsheet newspapers.
Advertising and Marketing - Developing consumer loyalty by establishing branded
products can make successful entry into the market by new firms much more
expensive. Advertising can cause an outward shift of the demand curve and also
make demand less sensitive to changes in price
Brand Proliferation - In many industries multi-product firms engaging in brand
proliferation can give a false appearance of competition to the consumer and
disguises from consumers the actual degree of concentration within the industry. This
is certainly true in markets such as detergents, confectionery and household goods –
it is an essential part of non-price competition.
Why are monopolies bad?
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Economic Case against Monopoly
A monopolist is able to enjoy and exploit some power over the
setting of prices or output. The monopolist cannot, however, charge
a price that the consumers in the market will not bear! In this sense,
the elasticity of the demand curve acts as a constraint on the pricing
behaviour of the monopolist.
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The main case against a monopoly is that these businesses can
earn higher than average profits at the expense of allocative
efficiency.
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The monopolist is seeking to extract a price from consumers that is
above the cost of resources used in making the product.
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Consumers’ needs and wants are not being satisfied, as the product
is being under-consumed. Consumer sovereignty has been
replaced by producer sovereignty.
What is meant by increasing
returns of scale?
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Increasing returns to scale
 When
the % change in output > %
change in inputs
 E.g.
a 30% rise in factor inputs
leads to a 50% rise in output
 Long
run average total cost will be
falling
So what factors influence
economies of scale?
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Technical Economies of Scale
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The Law of Increased Dimensions
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Economies of linked processes
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Large-scale indivisible units of capital machinery
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Specialisation and Division of Labour
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Marketing Economies
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Risk-Bearing Economies (lower risks)
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Managerial Economies
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Learning Economies
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Financial Economies
Draw an economies of scale
diagram…
Show 3 SRAC curves to the optimum
productive efficiency point and another
SRAC which illustrates diseconomies of
scale.
 Clearly label the LRAC curve as well…
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Next slide has the answer…
ILLUSTRATING ECONOMIES AND DISECONOMIES OF SCALE
Productive efficiency in the
long run is achieved when
output is produced at the
bottom of the long run
average cost curve
Costs
SRAC1
SRAC3
SRAC2
AC1
LRAC
AC2
AC3
Q1
Q2
Q3
Output (Q)