The allocation of resources Flashcards
Chapter 2
Demand
The quantity of a good or service that consumers are willing and able to buy at a given price in a given time period
Supply
Refers to the quantity of output that the producers are willing and able to offer for sale at different price in a given time period of time
Microeconomics
The study of the economic behavior of households and firms and the performance of individual markets
Macroeconomics
The study of the whole economy
3 key questions
What to produce?
How to produce?
For whom to produce?
Price mechanism
Decision according to the market equilibrium
Factors that affect demand
- advertisement
- government policies
- consumers taste
- consumers income
- price of substitutes
- interest rate
Individual demand
demand of one individual or firm
Market demand
aggregate (total) of all individual demand
Factors that affect supply
- cost of FOP
- prices of other goods
- global factors
- technology advancement
- business optimism
Individual supply
supply of an individual producer
Market supply
aggregate of the supply of all firms in the market
Market equilibrium
when the supply & demand are equal to the economy
Price elastic demand (PED)
the responsiveness of demand to a change in price
Factors that affect PED
- number of substitutes
- time period
- proportion of income
- necessity of products
Price elastic supply (PES)
the responsiveness of quantity supplied to a change in price
Factors that affect PES
- time
- availability of resources
- supply available to meet demand
- spare production capacity available
- factor substitution available
Market economic system
a system run by private individual of firms
Market failure
when price mechanism / market mechanism fails to allocate scares resources
Mixed economic system
runs by the government
Minimum price control
(set above equilibrium)
- price are not permitted to fail below a certain level
Maximum price control
(set below equilibrium)
- price are not permitted to rise above a certain level
External growth of firms
Increase in size / output of firms due to merger
Minimum price
Price that set below equilibrium. Price are higher to encourage production and help producers.
Maximum price
Price that set below equilibrium. Price are lower to encourage consumption and help poorer people
