The price system and the microeconomy (AS level) Flashcards
Price mechanism
the means of allocating resources ina market economy
Consumers
individuals or households who buy goods and services for their own use or for others
Market
where buyers and sellers get together to trade
Demand
the quantity of a product that consumers are willing and able to buy at different prices per period of time other things equal, ceteris paribus
Supply
the quantity of a product that producers are willing and able to sell at different prices within a time period, other things equal, ceteris paribus
Supply chain
all the stages of a product’s progress from raw materials, production and distribution until it reacher the consumer
Notional demand
where buyers may want to buy a product but which is not always backed up by the ability to pay
Effective demand
demand that is supported by the ability to pay
Demand curve
a line plotted on a graph that represents the relationship between the quantity demanded and the price of a product
Market demand
the total amount demanded by consumers
Demand schedule
the data from which a demand curve is drawn on a graph
Movement up and down a demand curve
shows how quantity demanded responds to a change in price.
Normal goods
where the quantity demanded increases as income increases
Inferior goods
where the quantity demanded increases as income decreases
Substitute
an alternative good
Complement
a good consumed with another
Joint demand
when two goods are consumed together
Supply curve
a line plotted on a graph that represents the relationship between the quantity supplied and the price of the product
Supply schedule
the data from which a supply curve is drawn on a graph
Subsidies
direct payments made by the government to producers of goods and services
Indirect tax
a tax levied on goods and services, such as general sales tax
Extension of demand or supply
an increase in the quantity demanded or quantity supplied
Contraction of demand or supply
a decrease in the quantity demand or quantity supplied
Elasticity
a numerical measure of responsiveness of one variable following a change in another variable ceteris paribus
Elastic
where the relative change in the quantity demanded is greater than the change in price, income or the prices of substitutes and compliments
Inelastic
where the relative change in the quantity demanded is less than the change in price, income or the price of substitutes and complements
Price elasticity of demand (PED)
measures of the responsiveness of the quantity demanded for a product following a change in the price of the product,
Price elastic
when the relative change in the quantity demanded is greater than the change in price of the product
Price inelastic
when the relative change in quantity demanded is less than the change in price of the product
PED calculation
% change in quantity demanded / % change in price
Perfectly inelastic
where a change in price has no effect on the quantity demanded
Perfectly elastic
where all that is produces is sold at a given price
Unit elasticity
where the change in price is relatively the same as the change in quantity demanded
Income elasticity of demand (YED)
measures the responsiveness of the quantity demanded for a product following a change in income
Necessity good
a type of normal good with a YED that is close to 0
Superior good
a good with a YED greater than 1
Cross elasticity of demand (XED)
measures the responsiveness of the quantity demanded for one product following a change in the price of another product
YED calculation
%change in quantity demanded / % change in income
XED calculation
%change in quantity demanded of product A / % change in the price of product B
Price elasticity of supply (PES)
a numerical measure of the responsiveness of the quantity supplied to a change in the price of the product
Price elastic supply
the quantity supplied responds more than proportionately to a change in its price
Price inelastic supply
the quantity supplied responds less than proportionately to a change in its price.
PES calculation
%change in quantity supplied / % change in price
Equilibrium
where demand and supply are equal
Disequilibrium
a situation where demand and supply are not equal in the market
Equilibrium price
the price where demand and supply are equal,where the market clears
Equilibrium quantity
the amount that is traded at the equilibrium price
Changes in demand (or supply)
when there is a shift in the demand (supply) curve due to a change in factors other than the price of product
Excise duties
a specific tax that is levied on goods such as cigarettes
Ad valorem tax
a tax that is charged as a given percentage of the price
Derived demand
where the demand for a good or service depends upon the use that can be made from it
Joint supply
when two items are produces together
Rationing
where the producer limits the supply of products in the market to ensure the products remain exlusive
Signalling
where decisions taken by buyers or sellers are determined by the price
Transmission of preferences
the automatic way in which the market allows the wants of consumers to be made known to producers
Incentive
Where low or high prices influence consumption and production encouraging buyers to consume and sellers to produce
Consumer surplus
the difference between the price a consumer is willing to pay for a product and its market price
Producer surplus
the difference between the price the producer is willing to accept and what is actually paid.
