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.
