Micro 11 - Interrelationship between markets Flashcards
Price mechanism definition
The price mechanism is how the decisions taken between consumers and producers interact to allocate scarce resources
What 3 functions does price have in a market economy?
- Signalling
- incentives
- Rationing
What is the signalling function of price in a market economy?
Prices adjust to indicate where resources are required
e.g: If prices are rising because of high demand from consumers, this is a signal to suppliers to expand production to meet the higher demand.
What is the incentives function of price in a market economy?
an increase in the price of any product encourages the producers to supply more of that product.
What is the rationing function of price in a market economy?
people drop out of the market due to high prices
How does an increase in non-dairy products affect dairy products?
Producers have less incentives to produce dairy products, so shift their factors of production to non-dairy products
What is derived demand?
Demand in one thing resulting form demand in another
What is complementary demand?
Demand for goods which are interdependent
What is composite demand?
Demand for goods which have multiple uses.
E.G - Wheat. As Biofuel demand grows, firms use more wheat to produce biofuel. however, less wheat is available to make bread from so the supply curve for bread shifts left.
What is competitive demand?
How substitutes affect one another’s demand
What is joint supply?
The production of one good leads to the supply of a by-product
What is price gouging?
When Firms take advantage of a crisis by charging vastly inflated prices
Is price gouging legal
Illegal
Advantages of price gouging? (4)
- Good for firms
- More VAT
- Producers increase supply long term
- Rations the service to the people who want it most
Disadvantages of price gouging? (2)
- Could result in fines
- Panic buying
