Law & Demand Flashcards
Week 3
What is a market?
A group of buyers and sellers of a particular good or service.
What is demand determined by in a supply market?
Buyers/Consumers
What is supply determined by in a supply market?
Sellers/Producers
How are the three key economic questions answered?
In the market system, the three key economic questions are answered by the price mechanism
What are the three key economic questions and who are they answered by?
- What to produce? Consumers
- How to produce? Producers
- For whom to produce? Both Consumers and Producers
Compare demand and quantity demanded
Demand refers to the buying intention of consumers. The quantity demanded of goods and services is the quantity that consumers are willing and able to purchase at a particular price and time.
Define demand and how it differs from wants.
Demand is not the same as wants and only refers to the actual buying intentions of consumers
What is the law of demand?
It describes a negative relationship between price and quantity demanded.
As the price of a good rises, people buy less of it, holding other factors constant.
What are the two effects that explain why the law of demand occurs?
- The Income Effect
- The Substitution Effect
What is the income effect?
When prices rise, consumers are not willing to buy as much of a good because their real income or purchasing power has decreased.
What is the substitution effect?
When prices rise, other goods become more attractive to buyers because they are relatively cheaper.
How does the strength of the law of demand vary between different goods?
The law of demand varies in strength between different types of goods depending on how strong the income and substitution effects are.
Provide an example of the law of demand
Petrol – there are few close substitutes for petrol therefore if the price of petrol increases, consumers will continue to demand petrol, leading to a weak strength in the law of demand
Describe the relationship between individual and market demand schedules
The individual household schedules collate to create the market demand schedules. The individual household schedule represents single consumers, households or businesses.
The market demand represents the number of people in the market.
What is the economic system?
The way in which a country’s resources are allocated to deal with economic problem.
What is a market economy?
When resources are privately owned, all decisions are made by the owners acting in their own self-interest.
Provide two examples of market economies
Australia and the US are predominantly free market economies
What is a planned economy?
When resources are owned by the state and decisions are made by a planning authority.
Provide two examples of a planned economy
Socialist or communist countries such as North Korea and Cuba
