3. Demand supply and price. Flashcards
What is a factor of production?
A resource required to for production to take place.
What is the law of demand?
As the price of a good falls, all other things being equal, the quantity demanded of that good increases.
What is extension of demand and how is it shown graphically?
An increase in the quantity demanded because the price has fallen, it is shown by a rightward movement along the existing curve.
What is contraction of demand and how is it shown graphically?
Decrease in quantity demanded because price has risen. Shown by a leftward movement along the curve.
What is the substitution effect?
It is the increase in demand for a good whose price has fallen with the demand for other goods fallen. Provided the prices of those goods are unchanged.
What are the definitions of normal good and inferior good?
Normal good is a condition of demand where buyers buy more as their income increases. Inferior good is where buyers buy less as their income increases.
A change in price will lead to a movement …….. the demand curve. A change in any of the conditions of demand will lead to a ….. in the demand curve.
- Along 2. Shift.
List 5 conditions of demand.
- Disposable income
- Price of substitutes
- Price of complements
- Pattern of tastes and preferences
- Market expectations
What is the law of supply?
As the price of a good rises, all other things being equal the quantity of that good supplied increases.
Define extension and contraction of supply and how they are shown graphically.
Extension of supply is the increase in quantity supplied because price has risen. It is shown by a rightward movement along the curve.
Contraction of supply is the decrease in quantity supplied because price has fallen. It is shown by a leftward movement along the curve.
List 5 conditions of supply.
- The costs of production
- The availability of productive resources
- Level of indirect taxes
- Prices of substitutes in production
- Prices of complements in production
What is equilibrium price?
The price at which quantity demanded and quantity supplied will be equal, and which will be restored by market forces following any changes in conditions of either supply or demand.
What is the mechanism of removal of shortage?
Where demand is above supply there will be a rise in sales, as a result firms will increase prices and extend supply by transferring resources to get higher profits.
As price rises demand contracts as consumers find substitutes giving better value for money. This will continue until the shortage is eliminated.
What is the mechanism for the removal of a surplus?
Where the supply is above the demand firms will see a rise in unsold products. As a result firms will cut prices and supply. As price falls demand extends as consumers are attracted by the fall in price.
What are the three functions of the price mechanism?
- Signalling to producers where the supply is too low.
- Rationing and allocating the resources of the firm to produce goods that are in high demand
- Rewarding firms for meeting consumer needs
