1.3: Introducing the market - the price mechanism

Question 1

Market

Answer 1

Any medium in which buyers and sellers interact and agree to trade at a price.

Question 2

Buyers

Answer 2

All those people or organisations that want to purchase something; they create the demand for goods and services.

Question 3

Sellers

Answer 3

All those people or organisations that want to sell something; they create the supply of goods and services.

Question 4

Demand

Answer 4

The quantity of a good or service that people are willing and able to buy at a given price, at a given time.

Question 5

Market demand

Answer 5

The sum of all individual demands for a particular good or service.

Question 6

Demand curve

Answer 6

Shows the relationship between price and quantity demanded on a diagram.

Question 7

Substitutes

Answer 7

Goods that can be consumed in place of another.
If the price of a substitute increases, the demand curve for the original good shifts to the right.

Question 8

Complements

Answer 8

Goods that are normally consumed together.
If the price of a complement increases, the demand curve for the original good shifts to the left.

Question 9

Changes in real incomes

Answer 9

When real incomes changes, so does the quantity demanded.

Question 10

Normal goods

Answer 10

For most goods and services, as real income rises so too does the quantity demanded and as income drops, so does quantity.

Question 11

Inferior goods

Answer 11

As income increases, quantity demanded falls and as income falls demand increases.

Question 12

Changes in tastes and fashion

Answer 12

If the preference for a particular good increases, the demand curve for that good shifts to the right, if it decreases it shifts to the left.

Question 13

Changes in size and age distribution of the population

Answer 13

As popular increases or decreases so does the demand for most goods and services.

Question 14

Advertising and branding

Answer 14

The whole point of advertising is to make us all buy more of something i.e. to increase demand and shift the demand curve to the right.

Question 15

Supply

Answer 15

The amount of a good and service that producers are willing and able to provide, at a given price, at a given time.

Question 16

Market supply

Answer 16

The total output of all individual suppliers of a particular good or service.

Question 17

Supply curve

Answer 17

Shows the relationship between price and quantity supplied.

Question 18

Changes in the costs of production

Answer 18

An increase in costs shifts the supply curve upwards and to the left.
If a furniture maker has to pay for more wood, then profits decline. The less attractive profit opportunities may mean that the producers cut output.

Question 19

The introduction of new technology

Answer 19

A technology change shifts to the supply curve to the right.
Technological progress allows firms to produce a given item at a lower cost.

Question 20

Indirect taxes

Answer 20

An increase in the tax on a product shifts the supply curve upwards and to the left. (The producers may have increased the price by the amount of tax.

Question 21

Subsidies

Answer 21

The subsidy cuts the cost of production for the producer and will shift supply curve to the right.

Question 22

Change in the number of firms in an industry

Answer 22

If the output of an industry grows, the supply curve shifts to the right. The supply curve shifts to the left as the size of an industry shrinks.

Question 23

External shocks

Answer 23

The supply of some goods is dependent on events beyond the producer’s control.

Question 24

Natural resources

Answer 24

The supply of some goods depends on the existence of natural resources.

Question 25

Equilibrium price

Answer 25

When the demand and supply curve are brought together on the same diagram: the point at which the curves cross each other

Question 26

Equilibrium

Answer 26

The quantity suppliers wish to sell is exactly equal to the quantity customers wish to buy.

Question 27

Excess demand impacts

Answer 27

Immediate impact is a shortage of that particular good or service.
The market is failing to clear because the current price is below the equilibrium level.
Some potential buyers will be unable to obtain the product.

Question 28

Excess supply impacts

Answer 28

The immediate impact is a surplus of that particular good or service.
Suppliers are unable to sell some of the goods and services that are available to buy.
The price is too high for some potential customers and the market will not clear.

Question 29

Excess demand

Answer 29

Occurs when the quantity demanded outstrips the quantity supplied.
Some people who want to buy at the current price will be unable to do so.
The price is too low for the market to clear.

Question 30

Excess supply

Answer 30

Occurs when the quantity supplied is greater than the quantity demanded.
Some suppliers will be unable to sell their goods at the current price.
The price is too high for the market to clear.

Question 31

Limitations of the demand and supply diagram

Answer 31

It is just a model: a simplified demonstration of a set of complex events that might otherwise be hard to understand.
Based on simplified assumptions
Relies on the condition that every other factor is equal.

Question 32

Consumer sovereignty

Answer 32

Describes the role of the consumer in determining the allocation of resources.
By buying what they want most consumers send a signal to producers about their preferences.

Question 33

Profit-signalling mechanism

Answer 33

Ensures that businesses do not long produce goods and services that do not sell and instead follow the incentive to focus on products that will generate profit because customers want to buy them.

Question 34

Profit as an incentive

Answer 34

Makes it worthwhile for businesses to use resources to produce the most popular products.
When many people want to buy something, that product becomes very profitable.
This signal tells the business to carry on upgrading the product and manufacture more.

Question 35

Price mechanism in a mass market

Answer 35

Products are usually standardised and targeted at a broad market segment.
Production is large scale and costs can be driven down with economies of scale, in order to be competitive with rivals.
Has the effect of shifting the supply curve to the right and lowering prices, so that large numbers of consumers will find the product affordable

Question 36

Price mechanism in a niche market

Answer 36

The products tend to be specialised or adapted to a much smaller market segment with very particular needs and wants.
Products will be carefully differentiated.
This usually increases the costs of production and so the supply curve is likely to be to the left.
Prices will often tend to be higher in a niche market.

Question 37

Niche market

Answer 37

A small part of the overall market that has certain special characteristics; may include providing a specialised or luxury product or service.
Niche marketing is used when a business focusses on a narrow or small market segment.

Question 38

Mass market

Answer 38

A very large market with a high sales volume.
The product or service tends to be standardised with little scope for individual adaptation.
Production takes place on a large scale, is often automated and enjoys economies of scale.

Question 39

Market growth

Answer 39

Implies an increase in the demand for a product.
Can be rapid if the product is new and many people want it or it can be slow and static if the product is well established .

Question 40

Factors for market growth

Answer 40

Luxury products - richer people need to be gaining ground with rising incomes
Changing fashions can cause markets to grow or decline

Question 41

Competitive advantage

Answer 41

Any feature of a business that enables it to compete effectively with rival products
Advantage may be based on price, quality, service, reliability, reputation or innovation.

Question 42

Product differentiation

Answer 42

Occurs when a business creates a distinctive product
May involve giving it unique features in order to attract customers, or may involve changing perceptions as to the function of the product
Branding may be a part of this as well

Question 43

Adding value

Answer 43

The difference between the price of a good or service and the cost of its material inputs.

Question 44

Pricing strategy

Answer 44

The way in which a business decides upon the price of its products
Output linked to price

Question 45

Dynamic markets

Answer 45

Markets that are changing all the time

Question 46

Stable markets

Answer 46

One in which the pace of change is slow; market size and market share are fairly constant with little variation in price.

Question 47

Market orientation

Answer 47

Creating products and services to fit the wants and needs of the customer.
Business adapts its products and innovates in order to compete successfully