Free Market Economies And The Price Mechanism Flashcards
What is a Free Market Economy?
A Free Market Economy is an economy that operates the distribution of scarce resources through market forces (Supply and Demand) and through the price mechanism, with no government intervention.
Advantage: resources are distributed based on demand, so those who want it get it.
Disadvantage: Favours those with access to more resources.
What are the properties of a Demand Curve?
The demand curve shows the quantity of a good or service that is desired for any given price. It slopes downward due to the income effect (the cheaper a product is, the lower the opportunity cost) the substitution effect( As price rises, consumers substitute with different goods) and the diminishing marginal utility law(utility generated from product consumption decreases each additional time).
What types of demand are there?
Effective Demand: the amount a consumer desires a good, backed up by a willingness to pay for it.
Derived Demand: A change in demand caused by a change in a complementary or substitute good
Latent Demand: when a good is desired, but the consumer is not willing to pay the high price.
What are the properties of a Supply Curve?
The Supply Curve represents the amount of a good or service that a producer is willing to supply for any given price. It’s upward sloping because of the Profit Motive (A product at a higher price gives the producer incentive to produce more to increase profits.) And the Cost of Production ( Increasing supply causes an increase in the costs of production, which is then transferred to higher consumer costs).
What is market equilibrium?
Market equilibrium occurs when the producer happy supplying to the level of demand that is willing to pay the given price. This is represented as the intersection points on a Supply and Demand graph.
What are the properties of a Demand Curve?
The demand curve shows the quantity of a good or service that is desired for any given price. It slopes downward due to the income effect (the cheaper a product is, the lower the opportunity cost) the substitution effect( As price rises, consumers substitute with different goods) and the diminishing marginal utility law(utility generated from product consumption decreases each additional time).
What types of demand are there?
Effective Demand: the amount a consumer desires a good, backed up by a willingness to pay for it.
Derived Demand: A change in demand caused by a change in a complementary or substitute good
Latent Demand: when a good is desired, but the consumer is not willing to pay the high price.
What are the properties of a Supply Curve?
The Supply Curve represents the amount of a good or service that a producer is willing to supply for any given price. It’s upward sloping because of the Profit Motive (A product at a higher price gives the producer incentive to produce more to increase profits.) And the Cost of Production ( Increasing supply causes an increase in the costs of production, which is then transferred to higher consumer costs).
What is market equilibrium?
Market equilibrium occurs when the producer happy supplying to the level of demand that is willing to pay the given price. This is represented as the intersection points on a Supply and Demand graph.
