competitive markets section 2 Flashcards
What is demand?
The quantity of a product, consumers are willing and able to buy at different prices in a specified time period
What is the relationship between the price of a good and the quantity demanded?
There is typically an inverse relationship: as the price of a good increases, the quantity demanded decreases, and as the price decreases, the quantity demanded increases.
what are the Factors that affect demand
Consumer tastes and preferences
Income available to the consumer
Prices of other goods and services
Substitute goods
Complementary goods
Consumer population
What is the definition of effective demand in economics?
Effective demand is the desire to buy a product or service that is backed by the ability to pay for it, meaning consumers have sufficient purchasing power to make the purchase.
What two elements are required for effective demand to exist?
A consumer must have both a desire to buy a product and the ability to pay for it (sufficient purchasing power).
What is latent demand
Latent demand exists when there is a willingness to purchase a good, but the consumer lacks the real purchasing power to afford the product.
What factor can influence latent demand
Latent demand is affected by persuasive advertising – where the producer is seeking to influence consumer tastes and preferences
What is derived demand
Derived demand occurs when the demand for one good is dependent on the demand for another related good.
what is joint supply
Where an increase/decrease in supply of one good leads to an increase/decrease in supply of another
What is composite demand in economics?
Where goods have more than one use – an increase in the demand for one leads to a fall in supply of the other
How does composite demand apply to a good like milk?
Milk – used for cheese, yoghurts, cream, butter, etc.
If more milk is used for cheese, ceteris paribus there is less available for butter
What is the substitution effect
The substitution effect occurs when a price increase causes consumers to switch to cheaper alternatives or ration their spending
What is the income effect?
The income effect occurs when a price increase reduces consumers’ purchasing power, meaning they can afford to buy less of the good, leading to a decrease in quantity demanded.
What does equilibrium mean in economics?
Equilibrium is a state of equality between demand and supply, where the quantity demanded equals the quantity supplied at a particular price.
What happens to the market price if there is no shift in demand or supply?
if there is no shift in demand or supply, there will be no change in the market price, and the market remains at equilibrium
What is excess demand?
: Excess demand occurs when the quantity demanded exceeds the quantity supplied at a given price, leading to a market shortage.
What is excess supply?
Excess supply occurs when the quantity supplied exceeds the quantity demanded at a given price, leading to a market surplus. This usually happens when the market price is above the equilibrium price.
What causes the supply curve to shift outward?
A fall in the costs of production (e.g., a decrease in labour or raw material costs)
A government subsidy that reduces producers’ costs for each unit supplied
Favourable climatic conditions leading to higher yields for agricultural commodities
A fall in the price of a substitute in production
An improvement in production technology, increasing productivity and efficiency
The entry of new suppliers into the market, increasing total market supply
what is the law of supply?
As the market price of a commodity rises, producers expand their supply onto the market.
What does a supply curve show?
A supply curve shows the relationship between the price and the quantity a firm is willing and able to sell.
What does “quantity supplied” refer to?
The amount of a good or service that producers are willing and able to offer for sale at a specific price.
How is the law of supply related to price changes?
According to the law of supply, as the price of a good or service rises, the quantity supplied increases, and vice versa
Why do supply curves typically slope upward?
Supply curves slope upward because, as the price increases, the quantity supplied increases, reflecting the incentive for producers to produce more at higher prices.
How do rising prices act as an incentive for producers?
Rising prices allow producers to earn higher profits, motivating them to expand production and supply more goods to the market.
What role does the law of diminishing returns play in supply?
As production increases, the cost of production typically rises due to diminishing returns. Higher prices compensate producers for these increased costs, encouraging them to supply more.
