lesson 8 Flashcards
Where does the price mechanism operate?
The price mechanism operates within a market to match up demand and supply
What happens to the market when there’s no government intervention?
The price and output of a product are determined by the demand of consumers and the supply of producers
When we are below the equilibrium price there is…
Excess demand
When we are above the equilibrium price there is an…
Excess supply
If there’s excess supply what do firms do?
Cut prices to clear stock
If there’s excess demand what do consumers do?
Bid up prices
The price mechanism always pushes the market towards…
Equilibrium
Factors that shifts demand
- Income
- Taste and preference
- Price of substitutes and complimentary goods
What happens when income changes?
The demand for a good can shift either left or right depending on what type of good we’re dealing with
Demand will shift in which direction for normal goods if there’s an increase in income?
Rightwards as people are able to afford branded products so they can leave inferior goods (unbranded)
What will happen to the demand curve for inferior goods if incomes increase?
There will be a leftwards shift because people have higher wages to be able to afford normal goods
Causes for a rightward shift in supply
- Reduction in labour costs
- Reduction in taxation
- Increase in productivity
- Reduction in raw material costs
What is a normal good?
The better quality alternative
What is an inferior good?
The lower quality alternative
What is the market mechanism?
When price adjusts to meet a new equilibrium
