Part 2 - How markets work Flashcards
What are the 4 functions of money?
Medium of Exchange (to pay for things)
Measure of Value (comparing values)
Store of Value (saving money)
Methods of Deferred Payment (loan)
What is demand?
Quantity of goods or services that will be bought at a any given price over a period of time
What is the substitution effect?
If the price of a good increases then consumers are likely to buy cheaper alternatives
What is the income effect?
If the price of a good increases then consumers will not be able to afford as much so won’t buy as much
What is diminishing marginal utility?
Each product provides progressively less satisfaction and consumers won’t pay as much
What is consumer surplus?
Difference between how much buyers are willing to pay for a good and how much they actually pay
Factors that cause a shift in the demand curve (PASIFIC)
Population
Advertising
Substitutes
Interest rates
Fashion, tastes and preferences
Income
Complements
What is supply?
Quantity of goods sellers are willing to sell at any given price over a period of time
What is Producer Surplus?
The difference between the price firms receive and the and the price they are prepared to sell at.
What causes a shift in the supply curve?
(PINTS WC)
Policies and Regulations
Indirect Taxes
Number of Firms
Technology
Subsidies
Weather
Costs of Production
What is excess supply?
When price is higher than equilibrium - producers expand production due to incentive effect
What is excess demand?
When price is below the equilibrium - expansion in demand but contraction in supply
What are incentives?
(Short term price mechanism)
Changes in price will incentivise existing producers to act differently
What is rationing?
(Short term price mechanism)
When there is insufficient supply to meet demand, price may increase so fewer people can afford
What is signalling?
(Long term price mechanism)
Changes in price inform economic agents where resources are needed, encourages entry/exit into market
