1.2 Price determination in a competitive market Flashcards
Definition of a market
A situation in which buyers and sellers come together to engage in trade
Definition of demand
The quantity of a good or service that consumers are willing and able to buy at given prices in a particular time period
Definition of effective demand
Consumers desire to buy a good , backed up by the ability to pay
What is the law of demand?
As the price of a good/service increases, the quantity demanded decreases (an inverse relationship)
What is a demand curve?
A curve that shows the relationship between the price of a product and the quantity of the product demanded
What is the difference between ‘quantity demanded’ and ‘demand’
Movements along the demand curve, caused by changes in price, is a change in the ‘quantity demanded’
Shifts of the demand curve, caused by a change in the determinants of demand, leads to ‘a change in demand’
What are movements along the demand curve?
Changes in the quantity demanded of a good that results from a change in that good’s price. A decrease in price leads to an increase in quantity demanded (an extension of demand)
Definition of conditions of demand
Factors other than the price of the good that lead to a change in position of the demand curve
What are shifts of the demand curve?
An increase in demand causes a rightward shift of the demand curve.
A decrease in demand causes a leftward shift of the demand curve.
What factors lead to shifts of the demand curve? (6)
- Changes to incomes - as incomes increase, demand for most products will rise (not inferior goods)
- Changes in population - as population increases, demand for most products will rise
- Changes in tastes and fashions - as a product becomes more fashionable, demand will increase
- Changes in advertising - if a business spends more on advertising its products, demand should increase
- Changes in price of substitutes - an increase in price of a substitute good will lead to an increase in demand for the alternative
- Changes in the price of complements - an increase in the price of a complementary good will lead to a fall in demand
Definition of supply
The quantity of a good or service that a firm is willing and able to supply at a given price in a given period of time
What is the law of supply?
As price of a good increases, the quantity supplied by a firm will increase
What is a supply curve?
A curve that shows the relationship between the price of a product and the quantity of the product supplied
What are movements along the supply curve?
An increase in price leads to an increase in quantity supplied (an extension of supply)
A decrease in price leads to a decrease in quantity supplied (a contraction of supply)
Shifts of a supply curve
An increase in supply causes a rightward shift of the supply curve
A decrease in supply causes a leftward shift of the supply curve
Factors which cause a shift of the supply curve (4)
- Changes in production costs - if costs increase (eg. raw materials costs rise) then supply will decrease
- Changes in technology/productivity - if there is a technological improvement, this will increase productive efficiency, and supply will increase
- Changes in indirect taxation - a rise in tax (eg. VAT) will lead to a decrease in supply
- Changes in subsidies (payment to producers to encourage output) - an increase in a subsidy will increase supply
Definition of market equilibrium
Where quantity demanded equals quantity supplied in a market
How does an increase in demand affect the market equilibrium?
An increase in demand would lead to a rightward shift of the demand curve. This would also lead to an increase in the equilibrium price and quantity.
How does a decrease in demand affect the market equilibrium?
A decrease in demand would lead to a leftward shift of the demand curve. This will also lead to a decrease in equilibrium price and quantity
How does an increase in supply affect the market equilibrium?
An increase in supply would lead to a rightward shift of the supply curve. This will also lead to a decrease in equilibrium price and an increase in quantity