Topic 2 - How Markets Work Flashcards
What are the three main sectors in the economy?
Firms, households, the government
What does an economic system do?
It organises resources for the production of goods and services.
It also satisfies the wants and needs of people who are part of the system.
What are markets
Where buyers and sellers come together
What are the benefits of the market?
- It brings together buyers and sellers
- It helps to allocate resources to goods that are in demand
- It coordinates decision making
- It provides plenty of choices
- Competition in the market helps to keep prices down
Define demand
The quantity demanded is the amount of a good that a buyer is willing and able to purchase.
What factors determines the demand?
- Price of a good
- Price of other goods
- Income
- Tastes
- Expectations
What is the demand curve?
A graph of the relationship between the price of the good and the quantity demanded.
What is the demand schedule?
A table that shows the relationship between the price of the good and the quantity demanded.
What is the law of demand?
The quantity demanded of a good falls when the price of the good rises.
What is the slope of the demand curve?
It is downwards sloping.
What causes a movement along the demand curve?
A change in price
How does the demand curve shift when demand decreases?
It shifts to the left
How does the demand curve shift when demand increases?
It shifts to the right
Define supply
Quantity supplied is the amount of a good that a seller is willing and able to sell
What factors determine the supply?
- Price of the good
- Price of other goods
- Costs of the factors of production
- Technology
- Tastes
What is the supply curve
A graph of the relationship between the price of the good and the quantity supplied
What is the supply schedule?
A table that shows the relationship between the price of the good and the quantity supplied
What is the law of supply?
The quantity supplied of a good falls when the price of the good decreases.
What is the slope of the supply curve?
Upwards sloping
What is equilibrium?
Situation in which the price has reached the level where the quantity supplied equals the quantity demanded.
What is price elasticity of demand?
The percentage change in quantity demanded caused by a change in price.
What is price elasticity of supply?
The percentage change in quantity supplied caused by a percentage change in price.
Price elasticity of demand formula
Percentage change in quantity demanded/ Percentage change in price
When is it perfectly inelastic?
0
Quantity demanded does not change as price changes
When is it inelastic?
Between -1 and 0
Quantity changes by a smaller percentage than price
When is unit-elasticity
-1
Quantity changed by the same percentage as price
When is price elastic
Less than -1
Quantity changes by a greater percentage than price
When is price perfectly elastic?
- infinite
Consumers are willing to buy all they can obtain at this price, however for a small change in price, they will buy nothing
Price elasticity of supply formula
Percentage change in quantity supplied/Percentage change in price
