1.3 Introducing the Market: the Price Mechanism Flashcards
Define a market
Any medium in which buyers and sellers interact and agree to trade at a price
What is a buyer?
People or organisations that want to purchase something, they create the demand for goods and services
What is a seller?
People or organisations that want to sell something, they create the supply of goods and services
Define demand
The quantity of a good or service that people are willing and able to buy at a given price, at a given time
What is market demand?
The sum of all individual demands for a particular product
What is the relationship between price and quantity demanded?
Inverse relationship
As price rises, quantity demanded falls
What must be included in a demand curve diagram (4)
Correct equilibriums
Axes labels
Labelled demand curve
P1, P2, Q1, Q2 labelled
What is a movement along the demand curve?
The price changes so the equilibrium moves along the same demand curve
What is a shift to the demand curve?
A non-price factor that affects demand
An increase shifts the line right
A decrease shifts the line left
What are the non-price factors of demand?
PRICE OF COMPLEMENT PRICE OF SUBSTITUTES ADVERTISING POPULATION INCOME TASTES & PREFERENCES
Define supply
The amount of a good or service that producers are willing and able to provide, at a given price, at a given time
What’s market supply?
The sum of total output of all individual suppliers or a particular product.
What affects how much a supplier is willing to supply?
The cost of the inputs and the amount of profit they expect to make. Higher prices give suppliers the incentive to provide more
What is the relationship between price and supply?
Positive relationship, as prices increases so does quantity supplied.
What causes a movement in quantity supplied?
A change in price
What are the non-price factors of supply?
TECHNOLOGY WEATHER LEGISLATION TAXES SUBSIDIES COSTS
What does a demand/supply curve in equilibrium show?
The market is clear, there is exactly enough supply to feed demand. It helps to decide allocation of resources as it indicates what consumers want. The equilibrium price is set here.
What happens if there’s excess demand?
A shortage of a particular product. The current price is too low.
What happens if there’s excess supply?
Surplus of a particular product. The current price is too high.
Why do oil supplies rise when the price is high?
Oil supply rises when price is high as suppliers have a higher incentive to produce more as the price is higher and they can make a larger profit.
What happened in the market after the horsemeat scandal?
The demand for beef fell due to the risk it was horsemeat and people switched to complements. This shifted the demand curve left.
What does ‘ceteris paribus’ mean and what relies on it
Means all things are equal
Demand and supply diagrams rely on this as they just look at one variable at a time which usually isn’t the case
In a free market how are resources allocated?
Profit signalling mechanism
Rationing - limits what a consumer can buy based on what they earn
Incentives - Profits
Signalling - Demand signals where resources should be
Define consumer sovereignty
The role the consumer plays in determining the allocation of resources
What is the main role of the profit-signalling mechanism
Ensures that businesses don’t allocate resources to places where there’s no demand
What does the profit-signalling mechanism depend upon?
Resources can easily be transferred
Markets are competitive
The market can feed the demand
How does supply work in a mass market?
Products are standard, target a lot of people. Production is large-scale and costs are low from EofS.
The supply increases and demand is high.
How does supply work in a niche market?
Products are specialised and target a small group of people.
Costs are usually higher and supply is likely to be low.
Define a niche market
Small proportion of the market, specific wants and needs.
Define a mass market
Large market, unspecific wants and needs.
Define market growth
An increase in the demand for a product. Can be rapid if the product is new.
