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Economics- Markets on the Move Questions

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Introduction

James Young ?AS? ECONOMICS F581 STANDARDISED ASSESSMENT 2 MARKETS IN ACTION MARKETS ON THE MOVE Question 1 A market is either a place of trade or willingness to trade or exchange goods or services; markets allocate the scare resources within our economy. A competitive market describes a market a substantial amount of buyers and sellers, meaning that no single buyer or seller can influence market price or any other aspect of the market. In a competitive market, no single buyer or seller has market control. A competitive market can achieve full efficiency in allocating our finite (scarce) resources if there is no market failure or disequilibrium. The economist Adam Smith coined the term ?Invisible Hand? which illustrates the importance of a free and competitive market. Smith concluded that society is in turn better off when individuals try to maximise their own good and wealth, through trade within a competitive market, without any government intervention. He concluded that the ?Invisible Hand? can guide an economy in a free market, through competition for scarce resources. Although these economic principles may have applied at the time, this is not necessarily applicable now to some sub-markets- e.g. the education market. Presently, the economy is not as much of a free market as it once was in Smith?s time, as the government has a much larger input into the economy in present day and aids the allocation of our scarce resources. ...read more.

Middle

There are several determinants of demand for package holidays. One determinant is price. A typical price for a package holiday to Tenerife for a week (two adults) with First Choice is £1300; a typical price for a package holiday to Florida for a week (two adults) with the same airline is £1600. Both of these holiday prices are scheduled during a non-peak time, meaning demand would be lower and so in turn the price would be lower comparative to a holiday during peak times. For example, for a package holiday for a week (two adults) in August- a peak time- would be approximately £2100 denoting a large shift in price in comparison to the off-peak holidays. The prices of package holidays are always more expensive in peak times e.g. school holidays, as suppliers know that at times of peak demand, the demand for holidays is price inelastic and therefore people will be more willing to pay a higher price for their holiday. Another determinant for demand is the income of the consumer. Typically, a rise in income will cause a rise in demand for a normal or luxury (of which package holidays are a part of) good, and a fall in income will typically cause a decrease in demand for package holidays as it is not an inferior good. ...read more.

Conclusion

PED is measured using the formula % change in quantity demanded/% change in price. If the PED is measured to be greater than 1, PED is elastic. When price elasticity of demand is elastic, this means that the gradient of the demand curve will not be very steep meaning that demand responds more than proportionately to a change in price. For example a 15% increase in price might lead to a 30% fall in demand. If PED is between 0 and 1, then PED is inelastic. If PED is inelastic, the gradient for its demand curve is fairly steep and this means that the change in demand will be proportionately smaller than the percentage change in price; an example of an inelastic product is tobacco, as people will continue to buy it despite the price due to it causing habitual consumption. If PED is exactly 1 then the price elasticity is said to be unit elastic, meaning that the percentage change in demand is exactly the same as the percentage change in price. If PED is equal to 0 then PED is perfectly inelastic, meaning that demand does not change at all when the price of a good changes; this is shown by a completely vertical demand curve. Income elasticity of demand is similar to price elasticity of demand, except that it focuses on the percentage change in consumer?s income as opposed to percentage change in price. ...read more.

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