Topic 1 - Price Mechanism Flashcards
What is meant by demand?
Demand is the quantity of a product that consumers are willing to buy at a given price at a set period.
Utility definition
The enjoyment and usefulness that we see with a product.
Effective demand
The desire to buy a product and the ability to pay for it.
Derived demand
Derived demand is the demand for a factor of production used to produce another good or service
The law of demand?
There is an inverse relationship between the price of a good and demand.
As prices rise we see a contraction in demand however if prices were to decrease the demand would expand
Ceteris Paribus assumption
Allows us to isolate the effect of one value
The demand curve and the two reasons why more is demanded when prices decrease
A demand curve shows the relationship between the price of an item and the quantity demanded over a
period of time. There are two reasons why more is demanded as price falls:
1. The Income Effect: There is an income effect when the price of a good falls because the consumer
can maintain the same consumption for less expenditure. Provided that the good is normal, some
of the resulting increase in real income is used to buy more of this product.
2. The Substitution Effect: There is a substitution effect when the price of a good falls because the
product is now relatively cheaper than an alternative item and some consumers switch their
spending from the alternative good or service.
What causes the demand curve to shift
factors such as income and preference will cause the demand curve to shift.
Supply definition
Supply is the quantity of a product that a producer is willing and able to supply onto the market at
a given price in a given time period
law of supply
as the price of a product rises, so businesses expand supply to the market. A
supply curve shows a relationship between price and how much a firm is willing and able to sell
Why a positive correlation with the supply curve
- The profit motive: When the market price rises following an increase in demand, it becomes more
profitable for businesses to increase their output - Production and costs: When output expands, a firm’s production costs tend to rise; therefore a
higher price is needed to cover these extra costs of production. This may be due to the effects of
diminishing returns as more factor inputs are added to production. - New entrants coming into the market: Higher prices may create an incentive for other businesses
to enter the market leading to an increase in total supply.
How exchange rates effect supply
If the exchange rate causes the currency to become weaker then it will cause imports to become more expensive whereas if the exchange rate causes the currency to become stronger then it was cause imports to become cheaper which means the exports will become more expensive. A stronger currency will cause the price to increase which means the supply will also increase.
How advances in production technology effects supply
An advance in production technology will cause an increase in the efficiency of the production process which means cost of production will decrease. This means the pricce sold to retailers will increase which means they will make profit. This means the supply will shift to the right( increase)
How the entry of new producers into the market effects supply
If more producers are supplying the product, there will be a higher quantity supplied into the markets. The market curve will shift rightwards with quantity supplied increasing.
How the favourable weather conditions effects supply
There will most likely be an increase in output from good harvest. This means that the quantity produced will increase which will cause the supply curve to shift to the right.
How taxes, subsidies and government regulations effect supply
If taxes are imposed then the profit motivated suppliers will have to increase the prices. This means the supply curve will shift upwards.
Explain how equilibrium occurs?
Means a state of equality or balance between market demand and supply. An “equilibrium” price in a market is the price which makes the planned demand of consumers and the planned supply of firms equal the market clearing price. But at most prices, planned demand does not equal planned supply. This is a state of disequilibrium because there is either a shortage or surplus and firms have an incentive to change the price.
Producer surplus
is the difference between the price producers are willing and able to supply a good or service for and the price they actually receive.
Consumer surplus
is the difference between the price they receive and the price that they are willing to pay.
Composite demand
This is when the use of a good has more than one use for example like milk. If there is an increase in demand for cheese then the supply of butter will decrease.
Joint demand
Is when goods are bought together such as a digital camera and a memory card
Price mechanism
is the interaction of demand and supply in a free market -> this interaction determines prices which are the means by which scarse resources are allocated between competing wants and needs. The price moves resources to where they are demanded or where there is a shortage and removes resources to where there is a surplus.
