Price Mechanism and its Application Flashcards
Demand
The quantity that consumers are willing and able to buy at each and every price, in a specified time period, ceteris paribus.
Law of Demand
The quantity demanded of a good is inversely related to its price, ceteris paribus.
Supply
The quantity which producers are willing and able to make available for sale at each and every price, in a specified period of time, ceteris paribus.
Law of Supply
The quantity supplied of a good is positively related to its price, ceteris paribus
Marginal Cost of Production
The change in total cost as a result of producing one more unit of output.
Non-Price Det of Demand: Substitutes
Substitutes: Different goods that can satisfy the same wants and are considered by consumers to be alternative to each other.
Non-Price Det of Demand: Complements
Complements: Different goods that are consumed together in order to generate satisfaction.
Non-Price Det of Demand: Income Levels
Normal good: Demand increases as income increases and vice versa, purchasing power greater.
Inferior good: Demand decreases as income increases and vice versa.
Non-Price Det of Demand: Expectation of future prices and income
When consumers expect price of a good to rise in the near future, they are likely to demand for more of the good now, before prices rise. As such demand of the good will increase.
Non-Price Det of Demand: Taste and Preferences
The more desirable consumers find the good, the higher the demand. It is affected by the level of advertising, trends and other considerations.
Non-Price Det of Demand: Interest Rates
If interest rates increases, the cost of borrowing to finance consumption expenditure will increase and thus households are less likely to borrow to finance consumption. Hence, there will be a fall in demand for cars.
Non-Price Det of Demand: Population
Size of population increases, demand for many products will increase. Composition of population also matters, as it will alter the pattern of demand for different goods and services.
Non-Price Det of Demand: Weather Condition
Changes in Weather Condition affects demand for certain goods and services where the goods are deemed as more desirable.
Non-Price Det of Supply: Price of factors of production
The higher the cost of production of a good, the lower the level of profit the producers will make at any price, assuming total revenue remains unchanged. Therefore, supply will fall as producers are less willing and able to produce the good at any given price.
Non-Price Det of Supply: Technology
Technology causes improvement in production technique. This results in an increase in the productivity of the factors of production and each unit of input will be able to produce more output, causing a lower cost of production per unit output.
