Chapter 3- Demand, Supply and Price Flashcards
What is the substitution effect?
The demand for a good whose price has fallen will increase, with demand for other goods falling.
Factors that can influence demand:
price of substitutes, price of complements (two or more goods consumed together like car and petrol) , market expectations
Demand:
A change in price will lead to movement along the demand curve where as a change in any of the conditions of demand will lead to a shift in the demand curve.
What is the law of supply?
As the price of a good rises, all other things being equal, the quantity supplied of that good increases.
Extension and contraction of supply:
Extension: increase in quantity supplied because price has risen (rightward movement along curve)
Contraction: decrease in quantity supplied because price has fallen (shown by leftward movement along the curve)
Conditions that affect supply:
cost of production, level of indirect taxes, prices of substitutes
Supply:
change in price will lead to movement along the supply curve. A change in conditions that affect supply will lead to a shift in the supply curve.
What does equilibrium price mean?
the price at which quantity demanded and quantity supplied will be equal and which will be restored by market forces following any changes in the conditions of either supply or demand.
Movement to equilibrium:
Shortage: where quantity demanded exceeds quantity supplied at the prevailing market price.
Surplus: where quantity supplied exceeds quantity demanded at the prevailing market price.
What is price mechanism and its functions?
The role of the price of the product in removing shortages and surpluses
signalling to produces when supply is too low or too high
rationalising and allocating the resources of a firm to produce those goods that are in a high demand
Rewarding firms for meeting consumer needs
