Chapter 5: Demand and Supply in action Flashcards
Determinants of demand
What could cause an increase in demand
- increase in the price of related goods
- increase in consumers income
- greater tastes/preferences
- increased population
- expected increase in the future prices of the good
Determinants of demand
What would cause a decrease in demand
- decrease in the price of the related goods
- decrease in consumers income
- reduced tastes/preferences
- reduced population
- expected fall in the future prices of the goods
Determinants of supply
What would cause an increase in supply
- A fall in the price of an alternative product/a rise in the price of a joint product
- A reduction in the price of any of the factors of production or other inputs
- An improvement in the productivity of the factors of production
Determinants of supply
What would cause a decrease in supply
- an increase in the price of an alternative product/a fall in the price of a joint product
- an increase in the price of any of the factors of production or other inputs
- A deterioration in the productivity of the factors of production
Ways in which government intervention can take different forms
Dissatisfaction often puts pressure on the government to intervene.
This can take different forms:
- Price ceilings (maximum)
- Price floors (minimum)
- Subsidies
- Taxes
Explain maximum prices: price ceilings, price control
- Maximum price or price ceiling is set when the government set a maximum legal limit of a price of a particular good or service
For this to have an effect on the market, the price ceiling must be set below the market clearing price (if it is set above it will have no effect)
Explain minimum prices: price floors, price support
- Minimum price or price floors is set when the government set a minimum legal limit of a price of a particular good or service
For this to have an effect on market, the price must be set above the equilibrium price
Reasons for setting maximum prices
If the government decides that the market clearing price of a good or service is too high and needs to be reduced a price ceiling may be imposed
- Help the poor by keeping the prices of basic food stuff low
- Avoid consumer exploitation by producers (unfair pricing)
- Combat inflation
- Limit the production of certain goods and services
Fixing prices below the equilibrium price will result in
- Shortages (excess demand)
- Prevents the market mechanism from allocating the available quantity among consumers
- stimulates black market activity by providing an incentive for people to obtain the good and re-sell it at a higher price
What are the solutions to dealing with excess demand
- Serve consumers on the first come first serve basis
- Informal rationing system (limiting quantity sold to each customer)
- Government may introduce an official rationing system by issuing ration tickets or coupons that must be submitted when purchasing
Reasons for setting minimum prices
Price floors are set by the government for certain commodities and services that it believes are being sold in an unfair market with too low of a price and that their produces deserve some assistance
Some situations in which price floors are imposed
- To attempt to raise incomes for producers of goods and services which are essential
- Serves as a guaranteed prices to produces
- to protect workers by setting minimum wage (ensuring that their own enough to lead a reasonable life)
Fixing prices above the equilibrium price will result in
- All consumers have to pay artificially higher prices including the poor
- Bulk of the benefit accrues to large producers s or big companies
- Inefficient producers a protected and managed to survive
- The disposal of the market surplus usually entails further cost to tax payers and welfare losses to society
What are the solutions to dealing with excess supply
- Purchasing the surplus and export it
- Purchasing the surplus and storing it
- purchasing the surplus and destroying it
- Government may even introduce production quotas to limit the quantity supplied to the quantity demanded at the minimum price
