Unit 1 - Competitive markets Flashcards
Demand
The quantity of a product that consumers are able and willing to purchase at various prices over a period of time
Definition of demand assumes that price is the only factor (ceteris paribus)
Market
where or when buyers and sellers meet to trade or exchange products.
Notional Demand
The desire for a product
Effective demand
The willingness and ability to buy a product
Ceteris Paribus
Assuming other variables remain unchanged
What is the relationship between demand and quantity?
The relationship between demand and quantity is inverse.
Consumer surplus
The extra amount that a consumer is willing to pay for a product above the price that is actually paid!
Real disposable income
Income after taxes on income have been deducted, state benefits have been added AND the result is adjusted to account for changes in prices!
Why is consumer income a determinant of demand?
If consumer income increases then so does demand as they have the ability to pay for the good and if consumer income decreases then so does demand as they lose that ability due to a lack of funds.
Normal goods
Goods for which an increase in income leads to an increase in demand, they also have a positive income elasticity of demand.
Inferior goods
goods for which an increase in income leads to a fall in demand
Substitutes
competing goods
Complements
goods for which there is joint demand
If the price of one substitute increases, what would happen to the demand of the other substitute?
It would increase as the first substitutes prices are no longer competitive.
What could cause a shift to the right in the demand curve? (4)
An increase in consumer income
A rise in price of substitutes
A fall in price of complements
A positive change in tastes and fashion
What could cause a shift to the left in the demand curve? (4)
A fall in consumer income
A fall in the price of substitutes
A rise in the price of complements
A negative change in tastes and fashion
Total revenue/expenditure =
Price x quantity
Supply
The quantity of a product that producers are willing and able to provide at different market prices over a period of time
What do economists assume the motives of a producer are governed by?
Economists assume that the motives of a producer are governed by profit.
What is the relationship between price and quantity supplied?
Suppliers always want to supply at a high price to maximise revenue!
There is a normal positive relationship between the two, if price rises, supply rises
Producer surplus
The difference between the price a producer is willing to accept and what is actually paid.
What are the determinants of supply? (4)
- Cost of production
- Size and nature of the industry (In a competitive industry, minor increases in costs can have a big effect on supply. In a inelastic market, the cost can be passed onto the consumer without it having a great effect)
- Government policy (VAT, regulations, subsidies)
- Factors that suppliers cannot control (eg weather)
What would cause a shift to the right in the supply curve?
- A fall in raw material costs
- An improvement in labour efficiency
- A reduction in the rate of indirect taxation
- A positive technological advance
- Any other positive factor
What would cause a shift to the left in the supply curve?
- An increase in raw material costs
- An increase in labour costs
- An increase in the rate of indirect taxation
- Any other negative factor
