Price Mechanism and Applications Flashcards
Define demand
The quantity of a good that a consumer is both willing and able to buy at each possible price during a given period of time, ceteris paribus
Define quantity demanded
The amount of a good a consumer is willing and able to buy at a given price over a given period of time
What are the determinants of demand
- Price of good itself
- Expectation of future prices
- Government policies
- Level & distribution of income
- Price and availability of related goods
- Taste and Preference
- Demography of population
(EGIPT - D)
What is the Law of Demand
States that in a given period of time, quantity of a good demanded is inversely related to its price, ceteris paribus.
What are three assumptions for demand/supply curve
A specific time period is involved
‘Ceteris Paribus’ –> everything else remains unchanged
Consumers/Producers expected to behave rationally
How does level and distribution of income affect demand of goods
Normal good demand rises as income rises, but inferior good demand falls as income rises
Why would there be an upward shift in demand curve
Willingness and ability to pay higher prices for the same quantity
Why would there be a rightward shift in demand curve
Increase in quantity demanded at every price
Define substitutes
Pair of goods considered by consumers to be alternatives to each other with the level of utility derived from consuming either good to be relatively similar
Describe competitive, joint, derived and composite demand
Competitive –> qdd rises/falls as rational consumers aim to maximise utility within given income, switch away from one good to other
Joint –> pair of goods consumed together to satisfy the same want (same consumer)
Derived –> Demand for one good results in demand for another (different consumers)
Composite –> Demand for good w different uses
Describe taste and preference in affecting demand
More desirable consumers find a good, the more of it they will demand at any given price to maximise utility
Describe expectation of future prices affecting demand
If price is anticipated to increase, current demand for good will increase to maximise utility within given budget, avoiding paying higher price in future (only for non-perishables)
Describe different types of government policies
command-and-control –> directly increase/restrict access to specific types of good
measures to adjust credit conditions –> directly affecting purchasing power and ability to buy
Define supply
The quantity of a good or service a producer is both willing and able to sell at each possible price during a given period of time, ceteris paribus
What are determinants of supply
- Price of good
- Marginal cost of production (technology, price of factor inputs)
- Government policies
- Price of related goods
- Expectation of future prices
- Number of sellers in market
- Unpredicted events
Explain rightward and downward shift in supply curve
Rightward–> positive marginal profits, incentivising them to increase production to capture additional profits
Downward –>more w/a to accept lower price to supply each additional unit of good
What affects marginal cost
Price of factor inputs –> marginal cost of producing additional unit of good falls relative to marginal revenue, increase supply to capture marginal profit
Technology –> Productivity increases, reduces input required for each add. unit of output, lowers marginal cost… (same as earlier)
Types of tax and effect on supply
Specific: Fixed rate per physical unit (parallel upward shift in supply curve)
Ad-valorem: Tax levied as percentage of price (pivotal shift in supply curve)
Rational and profit-maximising producers w/a supply same units of output at higher prices
Subsidies and effect on supply
Provision of money and other resources by government to support a person or bzness activity
Specific (parallel shift) and ad-valorem (pivotal shift)
Describe prices of related goods affecting supply
Joint supply: Higher production of one good increases for other (normally from same source)
Competitive supply: Production of one good decreases other (diverting from same source to other output)
Describe expectation of future prices effect on supply
Producers may temporarily hold back amount of goods they release into market, likely to build up stocks to sell at higher price
Describe number of sellers in market affecting supply
Increased number of sellers (e.g. due to lower barriers to enter industry) results in more producers more w/a to enter market, market supply increases
Describe equilibrium
In perfectly competitive markets, prices adjust until point where quantity demanded by buyers exactly equals quantity supplied by sellers, no pressure on price and quantity to adjust, equilibrium reached
(Essay skill) Describe how increase in demand affects market price and quantity
(explain reason for increase in demand)
Buyers bid up prices –> utility-maxing csrs constrained by budget, reduce qdd
–>o/p higher marginal cost more profitable at higher prices, firms increase qss
upward pressure as csrs more w/a after increasing price to bid
As price increases: qdd decreases, profit-driven producers increase qss, market adjusts until point where qdd = qss
