M2: Understand The Operation Of Market Forces

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Understand the operation of market force – Assignment 3, P5 & M2
Explain different types of market structure, P5, Task 1
Economists use models so they are capable of explaining or predicting in a simpler way as they can show what is happening between variables. So economists may build a model of the market they are explaining so they can show the relationship between, demand, supply and price. Models are built upon assumptions and once relationships have been made they can explain and predict different type of outcomes.
Elasticity
Elasticity is a measure of how much demand or supply changes in relation to change in one of its determinants. This will interest and benefit businesses as they can find out whether the goods that they are changing the price of are elastic or inelastic. Once they have figured this out they can then decide whether it is worth changing the price of the product or not. Also knowledge of whether good are elastic or not is a sensible way of price decisions as businesses need to know what will happen to revenues if there is a change in price.
Price Elasticity measures how much quantity demanded responds to a change in price. So if the change in demand is large then it is elastic but if there is little change in demand then it is called inelastic. The government should raise taxes on goods and services where there is inelasticity as they will not be much change in demand; this should lead to greater income for the government. There are four main factors that affect consumer choices and they are: * Substitutes – If there is a substitute to the good that is being increased in price then the consumer will go elsewhere for the cheaper product.

* Necessity or Luxury – If the good is a necessity then even if the price rises, demand is unlikely to decrease, e.g Petrol.
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