price mechanism and its applications (DD/SS) Flashcards
how does price mechanism allocate scarce resources
signalling (consumer to producer; expression of desire, tells producers what to produce), incentivising (incentives profit-maximising producers to produce good that has high price), rationing (restricts access to good, rationed to only those who can afford)
What is Law of Demand states
Qd of good is inversely related to price, ceteris paribus = downward sloping DD curve
definition of demand and quantity demanded and how is change in both represented
The demand of a good refers to the quantity of the good that consumers are
willing and able to purchase at every given price over a given period of time,
ceteris paribus.
- represented my shift in demand curve
Qd: at a GIVEN price
- represented by movement along demand curve caused by change in price
what is ceteris paribus assumption?
CPA states that other than the variable being studied, every other variable that could affect outcome remains constant
demand factors
- expectations of consumers
- government policies
- income
- population
- price of related good
- taste and preferences
define supply and Qs and how it is represented
The supply of a good refers to the quantity of the good that producers are willing
and able to produce at every given price over a given period of time, ceteris
paribus. (represented by shift of curve)
Qs: a given price (represented by movement along the curve)
what is Law of supply
The Law of Supply states that the higher the price of a good, the greater the
quantity supplied of the good, ceteris paribus. This implies quantity supplied is
directly related to the price of a good.
define market equilibrium
Market equilibrium occurs at the intersection of the demand and supply curve,
whereby quantity demanded is exactly equal to quantity supplied at the
equilibrium price. At this equilibrium, there is no tendency for the price and
quantity to change.
supply factors
- weather and season
- expectations of future prices
- technology
- price of related goods
- input prices
- government policies
- number of sellers
PAP framework for essays
PAP (framework to use whenever price changes and must be explained, depends on question whether need to draw or not)
- shortage (Qd>Qs)/surplus? (Qs>Qd) Created at equilibrium price
- Exerts upward/downward pressure on price
- How does the price mechanism signal/incentivise consumption and production? How does it affect Qd/Qs movement along the DD/SS curve?
- Price will continue to fall/increase until shortage/surplus is eliminated.
- New equilibrium p & q
- Determine magnitude of shifts if both ss dd increase or decrease. When P is indeterminant, if increase of DD is more than increase of ss, price increases. if SS increase more, price decreases
for Q, if SS increase more, q increases
what is a substitute and what is relationship between good and its sub
alternative of a good that satisfies similar consumer needs/wants
If two goods are substitutes of each other, a fall in the price of one good
would lead to a fall in demand for the other good. Likewise, a rise in the price
of one good would lead to a rise in demand for the other good.
what is a complementary good and what is relationship
Complements are goods/services that enhance consumers’ satisfaction when
consumed together.
If two goods are complements, a fall in the price of one good will lead to a
rise in demand for the other good. Likewise, a rise in the price of one good
will lead to the fall in demand for the other good.
how to explain change in demand
- Identify the change in the non-price determinant
- Elaborate on how this change affects the willingness and ability of consumers
of the good/service to consume at each and every given price level
(how does Qd change along demand curve) - Explain the impact on demand (increase or decrease) and the demand curve
(shifting to the left or right)
relationship of goods in competitive supply (what happens when one good increases in price)
Goods in competitive supply refers to goods that require the same resources
(factors inputs) in the production, hence the production of either good competes
for the same set of resources.
Hence, when two goods are in competitive supply, a rise in the price of one
good, ceteris paribus, will result in a fall in the supply of the other.
Conversely, a fall in the price of one good, ceteris paribus, will lead to a rise
in the supply of the other.
what is joint supply and what is rls of goods in joint supply
Joint supply refers to the production of a good leading to a simultaneous
production of another or more products.
Hence, when two goods are in joint supply, a rise in the price of the first
good, which is produced jointly with another good, will result in an increase
in the supply of the second good. Conversely, a decrease in the price of the
first good, will lead to a fall in the supply of the second good.
