price Flashcards
What is price?
The sum of money you have to pay for a good or service
-determined by interaction of supply and demand
How is price different to worth?
Is price a reflection of worth?
Worth is how much something is valued eg. after exercise may buy juice for same price however it may be with more to them
Due to scarce resources, we need some way of pricing items based on their worth
Cost vs price?
Cost is how much money it takes to provide the good or service
Price is the sum of money you have to pay for a good or service
What is efficiency?
The optimal production and distribution of scarce resources
The best production level is where avg production costs are at their lowest and profit margin is at the highest level
mhm
What are the three important ROLES OF PRICE in determining efficient distribution?
-Signalling____________________________________
prices change to signal where resources are needed
:if price rises ^ this shows that more resources are required
-Transmission of preferences______________________
Through their preferences, producers can send info to the resource suppliers about changing needs
Higher prices encourage owners to supply more
eg.if gov want more green energy ->gov is prepared to pay for it->suppliers encouraged to build wind farms etc
Rationing___________________________________
Prices help ration scarce resources
If resources are scarce,only those who are willing and able to pay the price are allocated the resources eg.concert tickets
What is equilibrium price and quantity?
Where Qs exactly matches Qd
Why is equilibrium price and quantity efficient?
exact quantity demanded (the amount that consumer wishes to buy)==exact quantity producers supply to market
This means that
- no products left
- no ppl left with effective demand
——————–»»>no excess of supply or shortage
How to analyse the interaction of supply and demand?
p61
https://docs.google.com/document/d/15RIVxpeuhU3xWw8sYTocTzO0NswraYIIsUm-WcEFmGc/edit
What is the determination of price?
The interaction of the free market forces of demand and supply to establish a general price level for a good or service
WHat happens if seller sets price above equilibrium price?
There is excess supply so some goods left unsold
Sellers/producers must REDUCE the PRICE
WHat happens if seller sets price below equilibrium price?
-There will be excess demand as many sellers will be unwilling/able to supply at that price so some buyers unable to purchase the product
Sellers/producers must INCREASE the PRICE
What is the allocation of resources?
how scarce resources are distributed among producers and how scarce goods and services are allocated amongst consumers
What is the role of markets in allocation of resources?
in a market system scarce resources are rationed; incentives are given to producers to supply more and signals are offered to both producers and consumers and to the owners of factors of production . These signals can be seen working in the cases of excess demand and supply explained earlier.
In a market economy consumers spending decisions will send signals to the producers about what goods to produce and how many to produce. If they are prepared to pay more, suppliers will move scarce resources to the production of that good and vice versa. This power of consumers to influence how the market allocates resources is called consumer sovereignty: in other words, consumers determine what is produced and for whom it is produced and thus rule the market (see Chapter 1.2). The market system, therefore, is a means of achieving the efficient allocation of resources
What are market forces?
Factors that determine price levels of goods and services in an economy WITHOUT government interventionn
