1.2 How Markets work Flashcards
what is demand?
its the quantity of good/service consumers are willing and able to buy at any given price in a given time period.
what is the law of demand
there is inverse relationship between price and quantity demanded.
p increases Qd decreases and vice versa assuming ceteris paribus.
explain contraction and extension in demand curve
contraction of demand is a decrease in demand as price increases
extension of demand is an increase in demand price falls
price only changes along curve.
what causes inverse relationship?
income effect
substitution effect
Diminishing marginal utility
as prices go up,purchasing power of someone’s income may not be enough to buy the product. decrease Qd
The substitution effect is when same product is bought cheaper than its competitors.eg iPhone cheaper than Samsung demand for iPhone increases due to price. increases Qd
diminishing marginal utility is when people consume a product they will get less satisfaction with each additional unit of that thing
what are shifts in demand caused by?
explain the shifts
affected by non price factors which cause curve to shift
shift outwards means increase in demand
shift inward decrease in demand
what are the factors for shift in demand curve
PASIFIC
Population
Advertising(review of products)
Substitute price (Coke vs Pepsi)
Income (normal and inferior goods)
Fashion/taste
interest rates(if consumers need to borrow for car or house)
Complements price(goods that rely on other goods,printer and ink)
define normal goods and inferior goods?
Normal goods
as income rises demand for these goods will rise eg luxury clothing.
Inferior goods
as income rises the demand for these goods will decrease eg fast food public transport
explain the demand terminology
effective demand is demand for a good or service from consumers that is backed up by the ability to pay.
derived demand is the demand for a factor od production that is used to produce another good or services.eg steel for house
composite demand is where goods have more than one use. eg milk
joint demand is when the demand for one product is durectly and positively related to market demand for another related good/service. Smartphone apps
what is supply?
its the quantity of a good or service that producers are willing and able to supply at any given price in each time period.
what is the law of supply?
as the price of a product rises, businesses expand supply.
Higher prices provide a profit incentive for the company to expand production.
what are shifts in a supply curve caused by?
its caused by changes in the condition of supply. affected by non price factors.
shift right= an increase in supply
shift left= an decrease in supply
what factors will affect supply?
-the cost of production
-changes in the productivity of labor
-technology
-unexpected events(IT failure led to a collapse in supply for industries, Air France Concorde crash 2000 suspended) concord for a year.
-conditions of nature(bad weather effects agriculture)
-industrial relations
-price of substitute
-govt policy
explain the factors listed in supply will affect it?
cost of production
refers to any outgoing a firm has to pay during the production process. ie wages, capital, utility bills. if production costs increase profits decrease so firms will increase prices to save profits. if they can’t pass the additional costs on to the consumer firm will lower production.
changes in the productivity of labor
if worker productivity increases (they produce more and become more efficient)Greater productivity results of an increase in human capital. supply increases cop decreases supply increases.
technology
advances in technology allow more products to be produced with fewer resources.average cost per unit falls.supply increases shift right.
explain the factors listed in supply will affect it?
govt policy
indirect tax increases cop
subsides have opposite affect reduces cop and grows supply.
price of substitutes
if the farmer makes 2 goods of equal amount of apple pear.
a rise in the price of apples encourages farmers to increase the supply of it rather than pears.
industrial relation
this is concerned with relations between workers and their management. if relationship is bad they can take action or strike.
explain what the supply curve looks like and the contraction and expansion of it.?
the supply line starts from the origin.
if movement is left there is a contraction of supply prices decrease.
if movement right there is an expansion of supply prices increase.
