Chapter 5 Flashcards
What causes demand to increase ?
- An increase in the price of a substitute product
- An increase in consumers income
- A greater consumer preference for the product
- An expected increase in the price of the product
What causes a decrease in demand ?
- A fall in the price of a substitute product
- A fall in consumers’ income
- A reduced preference for the product
- An expected fall in the price of the product
What happens to supply when demand increase ?
It remains unchanged, but when the price of the product increase, supply increases with it
What happens to supply when demand decreases ?
It remains unchanged, but supply decreases as the price falls
What causes an increase in supply ?
- A fall in the price of an alternative product or a rise in the price of a joint product
- A reduction in the price of any factors of production or other inputs
- An improvement in the productivity of the factors of production
What happens to demand when supply increases ?
It remains unchanged but increases when the price of the product decreases
What cause a decrease in supply ?
- An increase in the price of an alternative product or a fall in the price of a joint product
- An increase in the price of an of the factors of production or other inputs
- A deterioration in the productivity of the factors of production
What happens to demand when supply decreases ?
It remains unchanged, but has an upward movement along the demand curve
How is price (P) and quantity(Q) affected when there is a simultaneous change in demand and supply ?
- when both demand and supply increase, P is uncertain and Q increases
- When demand increase and supply decreases, P increases and Q is uncertain
- When demand decreases and supply increases, P decreases and Q is uncertain
- When both demand and supply decreases, P is uncertain and Q decreases
Government intervention?
- Setting maximum prices (price ceilings)
- Setting minimum prices (price floors)
- Subsiding certain products and activities
- taxing certain products and activities
What is the impact of Setting maximum prices ?
- Keeps the prices of basic foodstuffs low, as part of a policy to assist the poor
- Avoids the exploitation of consumers by producers (unfair prices)
- Combats inflation
- Limits the production of certain goods and services
What does fixing prices below the equilibrium do ?
- It creates shortages ( excess demand)
- It prevents the market mechanism from allocation the available quantity among consumers
- It stimulates black market activity by providing an incentive for people to obtain the good and resell it at a higher price to those consumers who are willing to pay higher prices to obtain it
What is created when the government fixes a minimum price above the equilibrium price? and what further intervention is required from the government?
~ It creates a market surplus
- Government purchases the surplus and exports it
- Government purchases the surplus and stores it (if non-perishable)
- Government introduces production quotas to limit the quantity supplied to the quantity demanded at the minimum price
- Government purchases and destroys the surplus
- Producers destroy the surplus
Why is setting minimum prices a highly inefficient way of assisting small or poorer producers ?
Because now
- All consumers have to pay artificially high prices
- the bulk of the benefit accrues to large producers or concerns owned by big companies
- inefficient producers are protected and manage to survive
- the disposal of the market surpluses usually entails further cost to taxpayers and welfare losses to society
Why do prices if agricultural products fluctuate much more than manufactured goods ?
The supply of agricultural products varies from season to season and if affected by the weather, disease and by the fact that many products are perishable and therefore cannot be stored for long periods
