MICRO - 5. market mechanism ✅

Question 1

what are complements

Answer 1

goods demanded together
JOINT demand
qd increase of one = qd increase of other , price increase of one = price increase of other
eg fish and chips

Question 2

what are substitutes

Answer 2

goods replaced by another good
COMPETITIVE demand
rise in P of one = rise in QD of other
eg playstation, xbox

Question 3

what is involved in derived demand

Answer 3

demand of product needed for production of other product
increase in demand for good = increase in P and QD of derived demand
factor of production only in derived demand

Question 4

what is involved in composite demand

Answer 4

good demanded for two or more uses
increase in demand for one composite good = rise in P and fall in QD of good in composite demand w it
eg land for residential, commercial, industrial uses

Question 5

what is involved in joint supply

Answer 5

good in joint supply with another when good supplied for two purposes
increase in demand = increase in P and QD
supply of other good increases = fall in P

Question 6

what is the purpose of the price mechanism

Answer 6

allocates resources between uses and interactions between S and D determines price and determines how much bought and sold

it has three functions:

• signalling
• rationing
• incentive

Question 7

what is involved within the rationing function

Answer 7

• economic problem so function of price is to allocate and ration these
• high price if scarce supply yet high demand, rationed to those willing to pay more
• low price if high supply yet lower demand ensures goods are bought

Question 8

what is involved within the signalling function

Answer 8

• price can reveal market conditions

- signal to those in market and economic decisions made thereafter

Question 9

what is involved within incentive function

Answer 9

• prices as incentive, more purchases if price is low so more utility
• high prices encourages higher sales and supply and investment into labour, capital so low prices discourage production

Question 10

what is a mixed and command economy

Answer 10

MIXED consists of market/non-market sector and planning is used to provide public/merit goods

COMMAND is when resources are directed towards allocation where need is greatest