Chapter 2: The determination of prices Flashcards
What is the law of demand?
More of a good will be demanded the lower its price and vice versa.
What is effective demand and does the demand curve illustrate this?
How much consumers are willing and able to buy at a given price and the demand curve does illustrate this.
What are determinants of demand?
Factors that can affect the demand for a product
What are the determinants of demand?
Advertising (as it can influence tastes), the price of substitutes, the price of complements, a rise or fall in individuals’ income, population size and providing credit as it may lure potential customers.
What is the ceteris paribus assumption?
Drawing the demand curve means that you have assumed that all other factors remain constant as a demand and supply diagram has only two axis.
How does a change in any of the determinants of demand affect the demand curve?
It shifts the demand curve which leads to an increase or decrease in the quantity demanded.
How will a change in price affect the quantity demanded?
It will lead to movements along the demand curve which results in extensions and contractions in quantity demanded.
What is consumer surplus?
The difference between what consumers are willing to pay for a good or service above what they actually pay.
What is the basic principle behind the supply curve and why?
More of a product will be supplied at a higher price than at a lower price as firms want to make profit.
What does ‘determinants of supply’ mean?
The other factors besides price that affect supply.
What are some determinants of supply?
Costs of production, technology, subsidies, taxes (they discourage production), government legislation and weather.
What is producer surplus?
The difference between the price that producers are willing to supply a good for below the price they actually receive.
What will an outward shift of the supply curve cause?
A fall in market price and a rise in equilibrium quantity which leads to an increase in the amount of producer surplus.
When do shortages occur?
When the price is below the equilibrium level.
When does equilibrium occur?
The point at which demand and supply curves intersect.
How can you calculate total revenue?
Quantity x price
What is speculative buying?
When you buy something just so that you can sell it for more and make a profit.
How do demand curves usually slope?
Downwards from left to right.
What do changes in price alone lead to in terms of the supply curve?
Movements along the supply curve.
What will a change in one of the determinants of supply lead to?
It will shift the supply curve.
What would happen if the costs of production were to increase?
No individual can pass the increased costs to the consumers in the form of higher prices as this will mean they won’t be able to sell their products so producers will be less willing to supply as much as before.
Why does an increase in technology shift the supply curve out?
It increases production because innovations make our existing stock of resources work harder.
What are subsidies?
Grants provided by the government to the suppliers of goods.
How do subsidies affect the supply curve?
They artificially reduce the costs of production for suppliers so they cause the supply curve to shift outwards.
