Price Mechanism - Interrelationship Between Markets Flashcards
What are markets?
Where buyers and sellers meet to exchange resources in order to achieve goals
What is the price mechanism?
the means by which decisions of consumers and businesses interact to determine the allocation of resources
What are the four main functions of the price mechanism?
Allocate
Rationing
Signalling
Incentives
What does the function “allocate” mean in the price mechanism?
Allocating scarce resources among competing uses
What does the function “rationing” mean in the price mechanism?
when there is a shortage of a product, price will rise and deter some consumers from buying the product
What does the function “signalling” mean in the price mechanism?
changes in price provides information to both producers and consumers about changes in market conditions
What does the function “incentives” mean in the price mechanism?
this is when the price of a product rises, quantity supplied increases as business respond
Competitive demand occurs when the demand for 2 products are in _______ to each other.
opposition
What type of products have competitive demand?
Substitutes
Describe the cross-elasticity of demand in goods with competitive demand.
High positive
Goods with competitive demand have high, positive cross elasticity of demand.
What happens to demand for goods with competitive demand when the price of one increases?
The demand for the one with the price increase, decreases and the demand for the other good increases
Joint demand occurs when the demand for two goods are __________
connected
Describe the cross elasticity of demand for goods which have joint demand.
High negative
What type of products are products with joint demand?
Complementary
Goods with joint demand have a high negative cross elasticity of demand.
When the price of one of these goods increases what happens to the demand of both of the goods?
The demand for both products decreases
Derived demand is the demand for a ______ of production used to produce another good or service.
factor
In goods with derived demand, what happens to the demand of the other product when the demand of its counterpart decreases?
Decreases as well
Composite demand is demand for a product which has more than one ___.
use
In a good with composite demand, what happens to the supply of the alternative use when the demand for one particular use rises?
Decreases
Joint supply is where the increase or decrease in the supply of one good leads to an increase or decrease in the supply of a _________
by-product
