Markets, Price mechanism 2A Flashcards
What is demand?
Demand/effective demand is quantities of a product that consumers are WILLING & ABLE to buy, (at various prices per period of time, c.p.)
Only effective when
1. Supported by income
2. Depends on price its offered
3. Flow concept, indicates amt demanded over a specified period of time
What is the law of demand?
Lower the price of good, Higher the qty demanded, c.p. (Inverse r/s) (causes PED to be -ve)
What are the 6 non price factors affecting demand?
- Changes in income
- Changes in price of related goods
- Changes in taste & preference
- Consumer expectations of future price & future income changes
- Government legislation
- Other factors
How does change in income (non price factor) affect demand?
As income rises, greater purchasing power,
1. Increases demand for normal goods
2. Decreases demand for inferior goods
(Affected by YED)
(Goods are not intrinsically normal/inferior)
How does change in price of related goods (non price factor) affect demand?
SUBSTITUTE
A rise in price of A will lead to an increase in demand of B vice versa.
The closer the substitutes are, the greater the fall in demand for A given a fall in price of B
(very responsive to change in price)
COMPLEMENT
Fall in price of A (used jointly tgt with B) leads to increase in Qd of B
The closer the complements, the greater the increase in demand of B when A falls in price
(very responsive to change in price)
XED
How does change in taste & preference (non price factor) affect demand?
Favourable change in consumer’s taste
Fashion, Ads, Culture, Influence
New products
How does consumer expectations of future price & future income changes (non price factor) affect demand?
If consumers expect price to rise, they will increase for demand now
If consumers expect pay cut next year, they will have decreased demand
How does govt legislation (non price factor) affect demand?
- Reduction in direct taxes
- Taxes levied on income & wealth, personal & corporate income tax - Provision of direct subsidies
- Increase the ability of households to spend, increasing demand - Changes in legislation
- affects demand for goods & services
How does other factors (non price factor) affect demand?
Changes in interest rates
Changes in weather
Changes in no. of firms
Changes in demographics/population
What is supply?
Supply/effective supply is quantities of a product suppliers are WILLING & ABLE to sell
(at various prices per period of time c.p.)
What is the law of supply?
The higher the price of the good, the higher the quantity supplied, c.p. (direct r/s +ve PES)
Why is the supply curve upward sloping?
Rising marginal cost of production faced by firm when it produces more output
What are the 6 non price factors affecting supply?
- Changes in cost of production
- Seller’s expectation of future price
- Changes in number of sellers
- Weather or abnormal circumstances
- Changes in price of related goods
- Firms objectives
How does change in cost of production (non-price factor) affect supply?
Higher unit COP, Lower Profit per unit, firms cut back on production, switching to alternative products
- Rise in wage, interest, rent, raw material price
-> Decrease unit COP, holding price of good constant, lower potential profit per unit - Changes in state of technology
- More efficient production method
-> more output per same input
- Holding price of good constant, leads to higher profit per unit
3a. Changes in govt. policies
- Indirect taxes on goods & services
- GST, sales tax, custom duties
(Indirect tax increase unit cost of supplying good, supply falls, producers switch to alternatives)
3b. Provision of subsidies to producers
- Lower COP per unit, increases potential profit per unit, holding price of good constant
How does seller’s expectations of future price (non-price factor) affect supply?
- HIGHER FUTURE PRICES
- Reduce current supply, release only when prices rises for higher profit - LOWER FUTURE PRICES
- Hastened unload of supply, current supply rise