How markets work

Question 1

What is rational decision making?

Answer 1

• When analysing markets, a range of assumptions are made about the rationality of economic agents
• Consumers are assumed to act rationally by maximising their utility
• Producers are assumed to act rationally by selling g/s in a way that maximises their profits
• Workers are assumed to act rationally by balancing welfare and work
• Governments are assumed to rationally by placing interests of the people they serve first in order to maximise welfare

Question 2

What is demand and the demand curve?

Answer 2

Demand is the amount of goods/services that a consumer is willing and able to purchase at a given price in a given time
Represented as price plotted against QD

Question 3

What are the movements along a demand curve?

Answer 3

• Contractions of demand move up the demand curve
• Extension of demand moves down the demand curve

Question 4

What is the price mechanism?

Answer 4

System by which price is determined in a free market via forces of demand and supply
Functions: signalling, incentives and rationing

Question 5

What is supply and supply curves?

Answer 5

Quantity of goods/services that producers are willing and able to sell at a given price
Contraction in supply moves down and extension moves up

Question 6

What are the conditions of demand?

Answer 6

• changes in income
• changes in tastes
• price of other goods
• changes in size and age of population
• social trends

Question 7

What are the condition of supply?

Answer 7

• change in production costs
• improved production methods
• goods in competitive supply
• goods in joint supply
• weather