U1 AOS 2 - Lesson 14/15 - Relative Prices Flashcards
What are relative prices in economics?
Relative prices are the price of one good or service compared to another, reflecting the opportunity cost of choosing one over the other.
True or False:
Relative prices can change due to shifts in supply and demand.
True
Fill in the blank:
The concept of relative prices is essential for understanding __________ in market economies.
resource allocation
Which of the following best describes the relationship between relative prices and consumer choice?
A) They are unrelated
B) They influence consumer preferences
C) They determine total market demand
B) They influence consumer preferences
True or False:
A decrease in the price of a good generally leads to an increase in the quantity demanded of that good.
True
Which of the following is a likely outcome of a significant increase in the relative price of a product?
A) Decrease in demand
B) Increase in supply
C) Reallocation of resources toward that product
D) No effect on production.
C) Reallocation of resources toward that product
True or False:
Changes in consumer preferences can cause relative prices to change.
True
Fill in the blank:
A decrease in the supply of a good, all else being equal, will generally lead to a ______ in its relative price.
increase
Which of the following factors can cause shifts in relative prices?
A) Changes in technology
B) Changes in income
C) Changes in government policy
D) All of the above
D) All of the above
Fill in the blank:
An increase in the price of a substitute good will lead to a __________ in demand for the original good.
increase
Short Answer: Name one demographic factor that can influence demand.
Age, gender, income level, or education level.
How do Relative Prices Impact Resource Allocation?
Increase in relative prices → sends price signals to producers that a temporary shortage exists → producers investigate if the shortage is caused by an increase in demand or decrease in supply
If caused by an increase in demand → producers will reallocate resources to producing the other good since the profit making opportunity has increased
If caused by a decrease in supply → producers will not reallocate resources as there is no increase in profit making opportunity (since the cost of production of the other good has increased)
Effect of a Decrease in Relative Prices
Backwards logic!
A decrease in relative prices means that the relative price of the good which is it being compared to has increased
What has happened to the relative prices of apples between period 1 and 2?
What has happened to the relative price of oranges between period 1 and 2?
Relative price of apples has increased (as it can now buy more oranges)
Relative price of oranges has decreased (as it can now buy less apples)
What is the relative price of beef, in terms of chicken, in period 1 and 2?
VCAA 2024:
Question 5
In the table, the relative price of milk compared with coffee between 2020 and 2024:
A. cannot be determined
B. remained unchanged
C. increased
D. decreased
D - decreased
In 2020, two litres of milk = one cup of coffee
In 2024, three litres of milk = one cup of coffee
Using the table below, which of the following is true?
A. Relative prices of dishwashers have increased, compared to freezers
B. Relative prices of dishwashers have increased, compared to fridges
C. Relative prices of freezers have increased, compared to fridges
D. Relative prices of fridges have decreased, relative to dishwashers
A
The relative price of desk lamps has increased compared to desk chairs.
It has been found that this is due to an increase in the price of copper wiring.
Will desk chair producers reallocate their resources to producing desk lamps?
No - increase in relative price is a supply shift (higher cost of production) so there is no increase in profit making opportunity
The relative price of notebooks has increased relative to copy paper.
It has been found that this is due to increased demand with the upcoming VCE exams.
Will copy paper producers reallocate their resources to producing notebooks?
Yes - increase in relative price is a demand shift so there is an increase in profit making opportunity
With winter approaching, the relative price of barbecues has decreased relative to slow cookers.
Will barbecue producers reallocate their resources to producing slow cookers?
Will slow cooker producers reallocate their resources to producing barbecues?
Decrease in relative price of barbecues compared to slow cookers → increase in relative prices of slow cookers compared to barbecues
Increase in relative price is a demand shift (taste and preference) so there is an increased profit making opportunity for making slow cookers
No increase in relative price of barbecues so slow cooker producers will not consider producing barbecues
