Unit 2 - The invisible hand of the market Flashcards
Phroibitive price
The phroibitive price of a good is the price at which the quantity demanded is zero.
Saturation level
The demanded quantity of a good at a price of zero is called saturation level.
Law of demand
If the price of the product rises, the quantity demanded decreases.
If the quantity demand decreases, the price fall.
Market demand
Totaling the demand levels of all buyers at any given price.
Demand curve
Graphic representation of the relationship between prices and the quantity of a good in demand within a market.
Ceteris paribus assumption
In latin means “All other things being equal” and is often assumed in simplified model of reality.
Factors that influence demand
- Consumer preferences: eg. increase in environmental awerness.
- Population size and structure: society’s age distribution.
- Advertising
- Consumer expectation: regarding future price developments.
- Price of related goods: depends if they’re sustitute goods or complementary goods.
Substitute goods
Two goods for which an increase in the price of one leads to an increase in demand for the other.
(coca-cola and pepsi)
Complementary goods
Two goods for which an increase in the price of one leads to a decrease in demand for the other.
(printer and ink cartiges)
Law of supply
At ceteris paribus assumption, the quantity of a good offered increases as the price of the good increases, and vice versa.
Supply curve
Graphical representation of the relationship between prices and the quantity of a good offered in a market.
Factors that leads a shift in the supply curve
- Price of production factors: producers reduce their output volume.
- Technological advancements: increase in availability and quantity of goods.
- Envionmental and social factors: failed harvest or regulations
- Expectations of suppliers
- Number of suppliers entering
Market equilibrium
A market situation in which the quantity supplied corresponds to the quantity demanded.
Market clearance
The quantity that consumers whish to purchase at the equilibrium price corresponds exactly to the quantity that producers are prepared to offer at the same price.
Stationary state
A system is in a stationary state when a stable equilibrium exists and the acting forces do not cause any futher change.
Excess supply
More producers wanting to offer their goods than there are buyers wanting to purchase them.
Excess demand
The quantity offered is too small, the buyers are not able to buy the quantity they want.
Market mechanism
Is a tendency, on a competitive market, for price to change untill the market is cleared. (in equilibrium)
Competitive market
A market with a very large number of buyers and sellers, whereby the individual can only influence the market price to a minor extent and not in a targeted manner.
Free entry, free exit
Assumption that sellers offer identical products
Allocation
Issuance of scarce resources to different uses within an economy.
Pareto-optimal
A situation in which is not possible to impove the position of one person without making another person worse off.
Elasticity
Is a number used as a measure of the percentage change in one variable due to a percentage change in another.
Price elastic
The % change in demand is grater that the % change in price.
When substitute goods are available.
Prce inelastic
The % change in demand is smaller tha the % change in price.
When substitute goods are NOT availabe.
Normal goods
Goods that are consumed more in absolute terms when income increareses. Could be necessary products (food) or luxury products.
Inferior goods
Goods that are consumed less in absolute terms when income increases.
Cross-price elasticity of demand
change in demand quantity (%) / change in income (%)
Allow changes in demand for one good to be understood when the price of another good changes.
Substitute goods > cross-price elasticity is positive
Complementary goods > cross-price elasticity is negative
