Demand and Supply I Flashcards
What is the difference between Central planning and decentralised planning?
Central planning is seen in Cuba and North Korea where what is produced, how and for who is determined. Decentralised systems rely on the market to determine this rather than an external entity.
What are the fundamentals behind the Market System?
Individual preferences and purchasing power -> costs of production -> generate prices -> acts as signals that coordinate decision making -> guide resource allocation in economy
How do decentralised markets do compared to centrally planned economies?
Decen markets usually outperform Centralised markets but sometimes they can fail.
What occurs in the real world when the price of a product decreases?
We consume more (inverse relationship).
What is demand a relationship between?
Price and Quantity demanded
What are some factors of a Demand curve?
Negative slope, relationship between $ and Q aka willingness to pay curve, as price decreases demand increases and vice versa, area under curve is money spent by customer.
What is the name of the condition needed for a demand curve?
Ceteris paribus - All other variables are held equal.
What are two important movements regarding the demand curve?
Movement along curve is dependant on a price change
Shift in the curve is dependant factors other than price
What happens to supply when price increases?
Producers supply more (upward curve).
What is the point in which the supply and demand curves intersect called?
Aka Market Clearing point IT IS NOT STATIC IRL IS DYNAMIC
Equilibrium point in which both producers and consumers are happy.
Supply = Demand
Define a competitive market
Many buyers and sellers, prices and quantities adjust until market clearing point is reached and there is no surpluses or shortages.
What are two things that governments do to markets?
Price floors (above clearing point).
Price ceiling (below market clearing point).
What is a price floor?
Above (HIGHER) than clearing point, minimum price that people have to pay is more.
What is a price ceiling?
Below market clearing point, minimum price that people have to pay is less.
What is something that can occur during a price ceiling?
Black markets as people are prepared to pay more for the limited supply.
What is Market Failure
An inefficient allocation of good and services in a market.
What is Consumer Surplus?
The max price an individual consumer is prepared to pay less the clearing price set by market = consumer surplus.
What is Producer Surplus?
The market clearing price less the minimum price a supplier would have been willing to accept in a sale.
How do you calculate surpluses?
Area of the triangles 1/2b x H
What is the Economic surplus stages in a competitive market?
Lots of buyers and sellers -> market clearing price reached -> economic surplus reached -> economic efficiency.
How do you calculate economic surplus?
Consumer surplus + Supplier surplus
What is a negative with competitive markets?
Consumer wants to pay less than MCP and suppliers want to pay more. Lobby/pressure from government helps here.
What does government intervention in markets cause?
Intervention -> movement away from competitive market equilibrium -> economic inefficiency
DEAD WEIGHT LOSS
What is dead weight loss?
Loss of surplus.
