1.3 Introducing the market Flashcards
Define demand
The amount of a good or service that consumers are willing to purchase at a given price
Name 5 factors that influence demand
Substitutes Income Taste / fashion Interest Rates External Shocks
How do substitutes influence demand?
People will buy cheaper alternatives if they’re available
How do interest rates influence demand?
Interest rates affect spending
Interest rate high = less borrowing = less spending
Define supply
The amount of a good or service that firms are willing and able to supply at a given price
Give 6 factors that influence supply
Operating costs Changes in technology Government taxes Government subsidies Number of producers in a market External shocks
How can changes in technology influence supply?
New technology can make production more efficient and thus increase ouput
How do taxes influence supply?
They increase the cost of production and reduce output
How do subsidies influence supply?
They decrease the cost of production and increase output
How do the number of producers in a market influence supply?
The more companies producing a product, the higher its supply
Define excess demand
When the price is below the free market equilibrium and demand is above the supplied amount
Define Excess supply
When the price is above free market equilibrium and there is less demand for the product than is supplied
Define market clearing
Market forces eliminate an excess through market clearing which forces the price to return to the equilibrium
Define price mechanism
The way in which price responds to changes in supply and demand so that a new equilibrium is reached
Names the 3 parts of the price mechanism
Rationing
Signalling
Incentive
Explain how rationing works in the price mechanism
Resources are finite so not everyone can have everything they want so prices are bid up and so only those that can afford it can have it
Explain how signalling works in the price mechanism
Prices determine where and how resources should be allocated. If prices increase, it signals that demand is high