Price Flashcards
Define price
The sum of money which has to be paid for a good or service
Define equilibrium price and quantity
Where the quantity supplied exactly matches the quantity demanded
Define determination of price
The interaction of the market forces of demand and supply to establish an equilibrium price (the general level of prices of a good or service)
Define allocation of resources
How scarce resources are distributed among producers and how scarce goods and services are allocated among consumers.
Define market forces
The factors that determine price levels and the availability of goods and services in an economy without government intervention (free market economy)
In a market economy, how is price determined?
By the interaction of demand and supply
What is the difference between price and worth?
- Price is used to indicate worth.
- Worth is how much you value something
How is price and worth linked?
- Individual’s may all be prepared to pay a different price for a product (they all value the product differently.
- You are willing to pay a high price to get something you really want.
How does worth change?
Worth varies depending on fashion, differences between people etc
What is the best production level?
Average costs are lowest, profits are highest
If resource allocation = signalling, what happens to price?
Prices signal where resources are needed. If the price rises, more resources are allocated to that area.
If resource allocation = transmission of preference, what happens to price?
By making choices, producers indicate their needs. Again, higher prices encourage owners of resources to supply more to producers
If resource allocation = rationing, what happens to price?
Where resources are scarce, price rises so that demands equals supply
What is equilibrium of price?
The market clearing price - where the amount that producers wish to sell is exactly equal to the amount consumers wish to buy
Why is equilibrium of price efficient?
There is no excess demand or supply.
If price is too high, what does this mean/ lead to?
Demand is lower than supply - leading to a fall in price until demand = supply (excess supply)
If price is too low, what does this mean/ lead to?
Demand is higher than supply - leading to a rise in price until demand = supply (excess demand)
What does excess demand/ supply lead to?
A disequilibrium
Explain a flow of resources
- Owners of factors of production sell their resources for the highest price to the highest bidder
- Firms buy the resources and produce goods and services to sell that people will buy in order to make profit
- Consumers buy goods and services which they most desire with their limited income gained from selling their resources
If there is a right shift in demand, what effect does this have on demand?
Increases
If there is a right shift in demand, what effect does this have on equilibrium price?
Increases
If there is a right shift in demand, what effect does this have on equilibrium quantity?
Increases
If there is a left shift in demand, what effect does this have on demand?
Decreases
If there is a left shift in demand, what effect does this have on equilibrium price
Decreases
