Theme 1.3 - Introducing the market: the price mechanism Flashcards
What is a market?
Any medium in which buyers and sellers interact and agree to trade at a price.
Define demand.
The quantity of a good or service that people are willing and able to buy at a given price.
Define market demand.
The sum of all individual demands for a particular good or service.
What are private benefits? Give 2 consumer objectives.
Benefits that accrue to an individual or firm through economic activity.
- Maximisation of private benefit from consumption.
- Maximisation of private benefit from working.
Describe a typical demand curve.
As price increases, the quantity demanded decreases (price is on the y-axis).
What is a normal good?
Where price rises, demand falls and vice versa.
What is a Veblen good?
Where price rises but demand still rises (luxury products).
What is the rational choice theory?
The assumption that all individuals make logical decisions that maximises their private benefits.
What are the determinants (factors) of demand?
- Price of a good
- Consumer income
- Price of other goods
- Consumer tastes/fashion
- Others e.g. advertising
What is the equation for quantity demanded?
qd = f (p, y, p of other goods…)
qd = quantity demanded
f = a function of
p = price
y= consumer income
Define ceteris paribus.
The idea that all other factors remain the same
What is a substitute product? How do these affect the demand curve?
A product that acts as an alternative, creating competition.
E.g. if the price of Coca Cola goes up, the demand curve shifts to the left but the demand curve for Pepsi will shift to the right.
What is a complementary product? How do these affect the demand curve?
A product bought alongside a good/service.
E.g if the price of fish goes up, the demand for chips will decrease, causing the demand curve to shift left.
If real incomes increase, how does this affect demand and demand for inferior goods?
- Demand will generally increase.
- Demand for inferior goods decrease as people can afford branded products.
What is a Giffen good?
- As the price increases, demand still increases regardless of consumer income.
- Giffen goods are rare forms of inferior goods that have no ready substitute or alternative, such as bread, rice, and potatoes.
How does changes in tastes and fashion affect the demand curve?
More fashionable products will experience an increase in demand.
How does changes in size and age distribution of the population affect the demand curve?
- Demand for goods will change with population size.
- Different demographics will see a change in demand.
How does advertising and branding affect the demand curve?
The demand curve will shift to the right through brand awareness and loyalty.
What is supply?
The amount of a good or service that producers are willing and able to provide, at a given price, at a given time.
What is market supply?
The total output of all individual suppliers of a particular good or service.
What is the supply curve?
It shows the relationship between price and quantity supplied. As price increases, the quantity supplied increases.
What causes a movement along the supply curve and what causes a shift in the supply curve?
- A change in price causes movement along a supply curve.
- A shift can be caused by several factors and can alter the level of supply.
What are the determinants of supply in a market?
- Price of a good
- Impact of changing costs of production
- Technology
- Prices of other goods and services
- Government policies e.g. tax and subsidies
- Others e.g. the expectations among producers of future prices.
How do production costs affect the supply curve?
If production costs increase, the supply curve shifts upwards and left as it decreases the quantity suppliers will offer at any price.
