How Markets Work Flashcards
What causes shifts in the demand curve
Real incomes - increase = increase in demand
Size/ age distribution of population - increase = increased demand
Tastes, Fashion - decrease in popularity = decreased demand
Price of substitutes/ complements - change in price, affects demand (rise in complement - petrol - left shift
(Rise in price of beef - substitute - demand for lamb will rise)
Advertising - successful = increase DEMAND
Interest rates - rise = increase cost of borrowing = decreased demand for houses, mortgages
What does marginal utility represent
Change in utility from consuming an additional unit of the product
What does the law of diminishing marginal utility state
As a person consumes more and more of a product, the marginal utility (extra satisfaction/ benefit) falls.
Consequently, people are prepared to pay less as their consumption increases with the result that there will be an inverse rship between the price + quantity demanded
What factors affect PeD
Substitutes
Time
Necessities
How large the % of total income in spent on expidenture
Addictive
High barriers to entry - in elastic
what are they key functions of the price mechanism in a free market economy
rationing device - market forces will ensure that the amount demanded is exactly equal to the amount supplied
incentive - the prospect of making a profit acts as an incentive to firms to produce goods
signalling device - to producers to increase or decrease the amount supplied
to determine changes in wants - change in demand will be reflected in a change in price
