2.4 Price Flashcards
What does price mean?
The sum of money paid for a good or service determined by the interaction of supply and demand.
How is price a reflection of worth?
Worth is how much you value something, so some may be prepared to pay different prices for a product based on how valuable they think it is.
What are the three functions of price?
- Signalling
- Rationing
- Transmission of preferences
How does signalling work?
Give an example.
Prices signal where resources are needed. For example, if prices rise, this means more resources need to be allocated to that area.
What is meant by rationing?
When resources are scarce, prices rise so only those that are willing and able to pay the higher price are allocated the resource.
What is meant by transmission of preferences?
By making choices, consumers indicate their needs to producers. Higher prices can also encourage owners of resources to supply more to producers.
What is meant by equilibrium price
and quantity?
Where the quantity supplied exactly matches the quantity demanded.
What are the two market forces?
Supply and demand.
What does determination of price mean?
It is the interaction of demand and supply to establish the general price level for a good or service.
What happens if the price for a good or service is too high?
If there are higher prices, this means demand is lower than supply. Therefore, there is excess supply and prices will have to fall until D=S.
What happens if the price for a good or service is too low?
If there are lower prices, this means demand is higher than supply. Therefore, there is excess demand and prices will have to rise until D=S.
In which direction to market forces move?
They will always move to reach equilibrium as they are more efficient since there is no excess demand or supply.
What does allocation of resources mean?
How scarce resources are distributed among producers and how scarce goods and services are allocated among consumers.
What role do markets have in allocating resources?
- Owners of factors of production sell their resources for the highest price.
- Firms buy these resources and produce goods to sell to consumers in order to make a profit.
- Consumers buy products with their income signalling where resources are needed.
What is the effect on equilibrium price and quantity if demand decreases?
If demand decreases, equilibrium price and quantity decreases.
