BA1 Fundamentals of Business Economics - The market system Flashcards
What is the Law of Demand?
As the price of a good falls, the quantity demanded increases, assuming all other factors remain constant (ceteris paribus).
What does the demand curve represent?
The demand curve shows the quantities of a good or service that consumers are willing and able to purchase at various prices.
What is an extension of demand?
When the price decreases, the quantity demanded increases, leading to a movement down the demand curve.
What is a contraction of demand?
When the price increases, the quantity demanded decreases, leading to a movement up the demand curve.
What causes a shift in the demand curve?
A change in non-price factors (conditions of demand) shifts the entire demand curve outwards (increase) or inwards (decrease).
How does the price of a substitute affect demand?
If the price of a substitute falls, demand for the original good decreases.
If the price of a substitute rises, demand for the original good increases.
How does the price of a complement affect demand?
Complements are goods in joint demand (e.g., DVDs & DVD players).
If the price of a complement rises, demand for the original good decreases.
If the price of a complement falls, demand for the original good increases.
How does income affect demand?
For normal goods, demand increases as income rises.
For inferior goods, demand decreases as income rises (e.g., instant noodles).
How do tastes and preferences affect demand?
Changes in consumer preferences (e.g., trends, advertising, health concerns) cause demand to increase or decrease.
How do interest rates affect demand?
Higher interest rates decrease demand for credit-sensitive goods (e.g., cars, appliances, homes).
Lower interest rates increase demand for these goods.
How does an increase in income affect demand for a normal good?
Demand increases as income rises.
How does an increase in income affect demand for an inferior good?
Demand decreases as income rises.
What is supply?
Supply is the quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a given time period.
What happens to supply when the market price rises?
Higher profits encourage businesses to increase output.
Higher prices signal firms to meet increased demand.
New firms enter the market, increasing overall supply.
What does the supply curve show?
The supply curve shows the relationship between the price of a good or service and the quantity a producer is willing and able to sell in the market.
What happens when the price of a good reduces?
There is a movement down the supply curve, known as a contraction of supply.
What happens when the price of a good increases?
There is a movement up the supply curve, known as an extension of supply.
How do costs of production affect supply?
Lower costs → Increase in supply (shift right)
Higher costs → Decrease in supply (shift left)
How does technology affect supply?
Advances in production technology increase supply by making production more efficient, shifting the supply curve right.
How do government taxes and subsidies affect supply?
Taxes on producers → Increase costs, decrease supply (shift left)
Subsidies → Reduce costs, increase supply (shift right)
How do climatic conditions affect supply?
Favorable weather → Increase in supply (shift right)
Poor weather (e.g., droughts, floods) → Decrease in supply (shift left)
How does the number of producers in a market affect supply?
More producers → Increase in supply (shift right), lower prices
Fewer producers → Decrease in supply (shift left), higher prices
What is price equilibrium?
Price equilibrium is the point where supply and demand are equal, meaning both buyers and sellers are satisfied with the price and quantity.
How is price equilibrium determined?
Price equilibrium is found at the intersection of the supply and demand curves in a market.
What is consumer surplus?
Consumer surplus is the difference between what consumers are willing to pay and what they actually pay at equilibrium.
What is producer surplus?
Producer surplus is the difference between the minimum price a producer is willing to accept and the actual price received.
