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
How does changes in number of seller’s (non-price factor) affect supply?
No. of producers increase, more goods & services are produced at every price
How does weather & abnormal circumstances (non-price factor) affect supply?
Bad weather, disasters, wars, political events decrease supply as production process is disrupted (supply shock)
Favourable conditions -> increased supply
*How does change in price of related goods (non-price factor) affect supply?
- Competitive supply
- Produced using same resources, more of 1 means less of the other (resources for both are switched easily) (chicken meat & eggs) - Joint supply
- Produced jointly, more production of one means more of the other (beef & leather)
How does firm’s objective (non-price factor) affect supply?
Some firms may not maximise profit
eg. maximising sales by increasing supply for bigger slice of market
Quantity demanded/supplied vs Demand/Supply
Qd/Qs refers to amt of good consumer is willing & able to buy, supplier is willing & able to sell AT A GIVEN PRICE at a certain time on a specific point on the demand/supply curve
(movement along curve)
Demand/Supply refers to quantities of a product consumers willing & able to buy, suppliers willing & able to sell AT VARIOUS PRICES c.p. represented by the ENTIRE demand/supply curve
(Shift of curve)
How to explain changes in demand & supply
ISSUE
Initial equilibrium
Shift (identify & explain)
Shortage/Surplus
Upward/Downward pressure on price
Equilibrium (new)
How to explain simultaneous shift?
ISJSUE
Initial equilibrium
Shift (identify & explain)
Judgement + draw diagram
Shortage/surplus
Upward/Downward pressure on price
Equilibrium (new)
In discuss qn, need judgement & CORe Criterion, Opinion, Reasoning evaluation
What is the role of the price mechanism in a market economy?
Answers what, how and how much and for whom to produce
Price is a signal between consumers & producers in reflecting their preference to buy & sell goods & services
[Consumer sovereignty in market economy]
What goods are in inter-related markets?
Complements XED
Substitutes XED
Joint supply PED
Competitive supply PED
Derived demand PES
Complements
Use of a good that requires the use of another
Demand of a product varies inversely with price of complements
(-ve XED, magnitude depends on complementary r/s)
Substitutes
Products that satisfy the same wants/needs
Demand for product varies directly w price of substitutes
Extent of increase of demand of B when price of A falls depends on how closely related they are
(+ve XED, magnitude depends on how close they are as substitutes)
Joint Supply
Increase in demand of A causes increase in supply of B
Depends on magnitude of increase in supply & PED
Competitive Supply
Increase in demand of A, decrease in supply of B as they use same resources
Depends on magnitude of decrease in supply & PED
Derived demand
- Dependent on demand of good that uses it
Steel is a derived demand of cars (factor of production) - Depends on magnitude of increase in demand of steel, & PES
D/S of determination of mkt price & output
Explain how an economic recession would affect the demand for cars in
a country. [2]
Fall in income, Less purchasing power
Assume normal goods, demand for cars decreases, demand curve shifts left
Explain how improved technology will impact the supply for cars. [2]
Improvement in state of tech, more produced per same input of resources, lowers unit COP
Firms more willing & able to produce at every price, supply curve shifts right
Explain how the above events will impact the market for cars. [4]
ISJSUE
Increase in supply reinforces fall in price of cars w fall in demand,
Impact on eqm qty of cars indeterminate, depends on extent of shift of both curves, if inferior good, shifts less
Demand and Supply in Inter-Related Markets
Explain how the technological breakthrough would affect the supply of
Apple iPhones. [2]
Streamline produce lower unit COP, increase profit PER UNIT
More willing & able to produce at every price & output
Explain how the strike by workers of LG and Samsung would affect the
demand for Apple iPhones. [3]
Reduce ability to produce, fall in supply, rise in price
As both are substitutes, increase in price of LG leads to increased demand for apple
Explain how events will impact mkt of iphones 4m
ISJSUE
Supply increase > demand increase
surplus, Qd increases Qs falls
Increase in supply reinforces increase in supply
Dependent on shift of curves
not close substitutes differ in features demand increase to small extent
With changing taste and preference towards processed food, explain how prices act as a rationing, signalling and incentive device in this market. [10]
INTRO: Price mechanism
- consumers and businesses interact in a market economy to determine the allocation of scarce resources between competing uses.
-Prices perform 3 important functions – signalling,
incentive and rationing.
SHIFT:
The mkt initially eqm at point E1, where eqm P & outpt for processed food is at P1 and Q1 respectively.
Demand increased -> favourable change in taste and preference
Consumers SIGNAL the increase in demand by casting more dollar votes.
Rightward shift of the demand curve to D2
Creates shortage, upward pressure on price, signalling producers to allocate more resources
Reallocation of resources to processed food, higher output, PRICE SIGNALS & INCENTIVISES what & how much to produce
Price acts as rationing -> distributed by availability of pay, increased pricess, rich able to cast more dollar votes, only supplied to those willing & able to pay
