Unit 2 Flashcards
Price mechanism
is essential to resource allocation. It sends signals from consumers to producers to adjust the quantity supplied in the market.
Consumers
Individuals or households who buy goods and services for their use or others
Market
buyers and sellers get together for trade or exchange
Demand
the quantity of goods and services that consumers can buy at a given price level.
Supply
the quantity of goods and services that producers can sell at a given price level.
Law of demand
When the price decreases, the quantity supplied increases (vice versa)
Notional demand
consumers may want to buy a product, but it is not always backed up by the ability to pay. Example: luxury bags or vehicles - students
Effective demand
demand backed up by the ability to pay. Examples: getting groceries from the supermarket - parents
Normal good
demand increases when income increases
Inferior goods
demand increases when income decreases
Substitutes
goods or services that can replace one another
Complements
goods or services that can be consumed together
Product
any item that is being traded i.e. goods and services
Suppliers
sellers of the product
Elastic
the relative change in quantity demanded is less than the change in price
Inelastic
the relative change in quantity demanded is less than the change in price
Price elasticity demand (PED) = ?
Measure the responsiveness of the quantity demanded for a product following a change in price
% change in Qd / % change in P
Income elasticity demand (YED)
Measures the responsiveness of the quantity demanded for a product following a change in income
Cross elasticity of demand (PED)
Measures the responsiveness of quantity demanded for one good following a change in price of another product
Price elasticity of supply (PES)
Measuring the responsiveness of the quantity supplied of a product following a change in price
Equilibrium
happens when quantity demanded equals to quantity supplied (where demand and supply meets)/ There is no tendency for price change
