The Price Mechanism Flashcards
what is effective demand
the demand backed up by the ability to pay
what is latent demand
demand that is not yet expressed or lacks the purchasing power to pay
what is derived demand
product x may be related to product y so their demands are related
what is the law of demand
an inverse relationship between price and quantity
what is the income effect
price falls as consumers can’t afford to consume
the substitution effect?
If price falls as similar products are cheaper
what factors cause a shift in demand?
price of a substitute, complement, changes in income, interest rates and the effects of marketing
what is supply
the quantity of a product that a producer is willing and able to supply on to the market
what is the law of supply
a positive relationship between price and quantity
what factors cause a shift in supply
changes in cost production, technology, government taxes/ regulations, competition
what are limitations of the supply and demand model
it has ceteris paribus assumptions, it assumes all markets are competitive and is a simplified demonstration
what does the signalling function include?
Surpluses or sacrifices etc
what does the transmission of preferences function need?
Consumers to send information through choices
what does the rationing function require?
A shortage of product
