Unit 2

SL Economics Year 1

Market

• A market is a situation where potential buyers are in contact with potential sellers. It enables the needs and wants of both parties to be fulfilled whilst establishing a price and allowing an exchange to take place.

Price

• In general – Price will continue rising until the shortage has thereby been eliminated.

And • Price will continue falling until the surplus has

thereby been eliminated.

Factor Market

• This also applies to workers and their skills.• If a laborer has a skill that is in high demand

he/she will be able to demand a higher salary, which will encourage more people to try to do that job. Wages will continue to rise until the demand is met.

• If there is a surplus than of a skill than of course the salary of those workers will drop, until the demand meets the supply.

Barriers to entry

• Barriers to entry are just that; obstacles, be it either institutional; government; technological; or economic that acts as restrictions on entry of firms into a market or industry.

• The four primary barriers to entry are: resource ownership, patents and copyrights, government restrictions, and start-up costs

• Barriers to entry are a key reason for market control and the inefficiency that this generates. In particular, monopoly, oligopoly, and often owe their market control to assorted barriers to entry.

• By way of contrast, perfect competition, monopolistic competition have few if any barriers to entry and thus little or no market control.

Sub-prime Mortgage

• A subprime mortgage is a type of loan granted to individuals with poor credit histories (often below 600), who, as a result of their deficient credit ratings, would not be able to qualify for conventional mortgages.

• Because subprime borrowers present a higher risk for lenders, subprime mortgages charge interest rates above the prime lending rate.

• There are several different kinds of subprime mortgage structures available. The most common is the adjustable rate mortgage (ARM), which initially charges a fixed interest rate, and then convert to a floating rate based on an index such as the federal interests rate plus a margin.

• ARMs are somewhat misleading to subprime borrowers in that the borrowers initially pay a lower interest rate.

• When their mortgages reset to the higher, variable rate, mortgage payments increase significantly.

• This is one of the factors that lead to the sharp increase in the number of subprime mortgage foreclosures in August of 2006, and the subprime mortgage meltdown that ensued.

"Law of Diminishing Marginal Utility"

• The "Law of Diminishing Marginal Utility" states that for any good or service, the marginal utility of that good or service decreases as the quantity of the good increases, ceteris paribus.

• In other words, total utility increases more and more slowly as the quantity consumed increases.

• There possibly is a threshold before this law applies.

• For example in order to play the game of golf you do require a “set of clubs”.

• You can continue to add to your set and until you have enough clubs to help you play a game of golf.