Price Demand Relationship: Normal, Inferior and Giffen Goods
If there is to be cross elasticity, there must be some relationship between the two . However, while all Giffen goods are Inferior goods, not all Inferior goods are. chapters wherever possible, crossword puzzles, question bank of short and long .. Relationship between Elasticity of demand & Total expenditure: a. In case of inferior goods, does law of demand fails as it fails in case of Giffen goods?. Giffen good = a good for which an a graph of the relationship between the price .
Objectives of producers Firms want to get the maximum from the resources that they use. In financial terms they want to maximise profit. This means that they may want to sell as low a quality product as they can for as high a price as possible. The general assumption of economics is that the main objective of private businesses is profit maximisation. Types of markets There are several different types of market.
Markets may be local, national or international. Here are some examples: Consumer markets There are two main types of these: Markets for consumer goods Consumer goods are goods bought by individuals rather than businesses.
Consumer goods are often divided into durable goods and non-durable goods. These are often traded on a national basis.
Markets for consumer services The provision of a service involves the seller 'doing something' for the buyers in return for money. This includes financial services, travel and tourism, all types of leisure services etc.
Services are part of the tertiary sector of an economy, and it is this sector which tends to grow most rapidly when living standards rise. Commodity markets A commodity can be defined as a raw material or a semi-raw material, e.
Such markets are often characterised by large fluctuations in price, mainly because of the instability of supply due to seasonal factors, the weather natural disasters etc. Major commodity markets exist in large cities such as London, Tokyo and Chicago. Capital goods markets The capital goods markets is where items bought by industries and business are traded, e.
Price Demand Relationship: Normal, Inferior and Giffen Goods
Capital goods are also known as producer goods as they are used in the production process to make other goods and services. Stock markets These are markets where the stocks and shares of public limited companies are traded, as well as other financial securities. Market structure In a competitive market, firms are expected to compete.
We have assumed so far in our market model that firms compete on price only. This is not the case in the real world.
Free Economics Flashcards about Macro/Micro Economic
Firms may compete on the basis of: Quality Reputation as well as on price. The world of competition is dynamic. Firms try to improve, to produce better products, to increase their market share etc.
They want to increase their profit. They will look at their production processes and try to reduce costs and to increase revenues. They will only do this if they can get something from it, and that something is profit. Unless there is a financial return they will not invest in any improvements.
Spectrum of competition However, the way in which competition manifests itself in a market depends on what is called the market structure. The market structure is the degree of competition in the market and the way in which the market is organised. As consumers, we would all like markets to be as competitive as possible to ensure a wide variety of goods and low prices, but firms would rather have less competition to make the market more profitable and to minimise the costs associated with competition for them.
Economists argue that competition is beneficial for a variety of reasons. They therefore set up what they consider to be the ideal form of competition - known as perfect competition.
This is a market structure at one end of the spectrum. At the other end is obviously little or no competition - this is called monopoly. In between is a range of market structures and we look at each of these below. Market structures - monopoly to perfect competition Perfect competition This type of market has many competitors, who produce the same product and the market sets the price. So, firms in this type of market are price takers they have little market power and have to be aware of all possible efficiencies, the lack of opportunities to use modern marketing techniques, the ease with which new entrants can join the market and the probability of low profit margins.
In fact, perfect competition should be considered as an ideal or a benchmark. It does not exist in practice, although some markets may approximate it. The key assumptions of perfect competition can be summarised as: The producer has the power to 'make' the price and profits will normally be high.
To maintain the high profits the producer will build as many barriers to entry as possible and try to keep the monopoly status by not allowing others to enter the market. Monopolistic competition This type of market is a cross between perfect competition and monopoly, having characteristics of both.
Firms have many competitors, but this time producing a different or differentiated product. They have some influence on prices within the market, but again have to concentrate on cost efficiencies and accept low profit margins. However, they can use marketing to promote their product but need to be aware that others can easily enter the market. Oligopoly This type of market has just a few competitors, and there is interdependence between the firms that comprise the market. The market relies a lot on non-price competition, e.
If successful in this type of market, the firm can earn large profits. To protect their market share they use marketing techniques to build brand loyalty via such features as unique selling points.
Microeconomics SL - Table of Contents
These are designed to build barriers to entry, so reducing potential competition. Some participants collude, or join together to make it even more difficult for new entrants to gain a place in their market. You may also like to see a table summarising each of these key market structures with examples.
Summary of market types The importance of price as a signal This section requires knowledge of the way in which demand and supply interact.
You may therefore wish to return to it after you have studied demand and supply analysis. Click on the relevant link in the table of contents on the left to switch to demand and supply or click the 'home' icon at the top or bottom of the page. The process of resource allocation As we have seen in Unit 1, the central problem of economics is one of scarcity of productive resources relative to the unlimited potential demand which could be made upon them.
It therefore follows that every society, be it centrally planned or based upon markets, has to have some mechanism by which its resources, that is its land, labour and capitalare allocated amongst all the numerous uses to which they could be put.
Unitary Elasticity happens when there is a one to one relationship between price and quantity demanded. The application of the Arc Elasticity formula is designed to show how far elasticity has moved from that one to one relationship - greater than 1 means an elastic response, while less than one means an inelastic response all numbers are treated in their absolute values Return to index Profit The difference between revenue money taken in and expenditure money spent.
Profit is, in Economic terms, the return to the Entrepreneur for taking the uninsurable risks of running a business. It is different from rewards to the other factors of production because it is residual what is left when all the other factors have been paid and may be negative not all enterprises succeed R Rectangular Hyperbola This is the slope of the Demand Curve when unity is achieved.
They show the relationship between Price and Quantity. This is called measuring along the curve. If anything other than Price causes a change in Quantity, this is represented by shifting the curve to the right or to the left. A demand curve will shift to the right upward from the Origin if more of the good is now being demanded at any given price and vice versa. A supply curve will shift to the right if costs of production have been reduced - to the left if costs of production have been increased Return to index Substitute Substitute goods are also known as competitive goods, i.
Not so with the supplier.
If the price of a good goes up, the supplier cannot always immediately increase the supply of the goods. There is quite often a time-lag. Regardless of what happens to the price of strawberries in June, the supplier cannot alter the quantity being supplied to the market - the decision on the quantity was taken some months previously Return to index Total Revenue Total Revenue is the total amount of money received by a supplier of goods. It is the price of the Goods Average Revenue multiplied by the quantity of goods which has been sold.