Unit 2 - The price mechanism and the microeconomy Flashcards
Define
Market
where buyers and seller meet with the intention of either buying or selling
Define
Product market
manufactured good
Define
Labour market
market for workers
Foreign Exchange Market
Market for currencies
Commodity market
Agricultural goods
Stock Market
market for financial securities
shares/bills/bonds
Who are buyers?
consumers whose main aim is to maximise utility
also reffered to as households
Define
Utility
Satisfaction derived from consuming a good or service
measures in utils
What is the aim of the seller?
to maximise profits
profits are the yard stick for success
Define
Demand
The amount of goods and services that buyers are willing to buy, at a given price, per period of time, ceteris paribus
What ways can the definition of demand be broken into?
- Quantity
- Products
- Buyers
- Willing to buy
- Able to buy
- Various/given prices
- Ceteris paribus
Define
Notional demand
want is not backed by purchasing power
buyer can’t afford
Effective Demand
Wanting is backed by purchasing power
Why is ceteris paribus part of the definition of demand?
The market is very turbulent for the price mechanism theory to work
Define
Demand Schedule
a table showing the levels of demand for a product at different prices per period of time, ceteris paribus
Define
Demand Curve
A curve showing the levels of demand at different prices, per period of time ceteris paribus
Explain the relationship show by the demand curve
The demand curve is downward sloping, showing an inverse relationship between price and
quantity demanded
What are the factors affecting demand
for a product or service
- Price of a good Itself
- Price of Complements
- Price of substitutes
- Consumers’ disposable income
- Advertising and promotion
- Availability of credit facilities
- Fashion taste and preferences
- Population
- Seasonal demand
- Changes in legislation
What causes movement of the demand curve?
Change of quantity demanded
This is caused by the price of the good itself and no other factor
What causes Expansion of the demand curve?
extenstion
Increase in demand caused by decrease in price of a good
What causes contraction of the demand curve?
A decrease in demand caused by an increase in the price of a good
What causes a shift in the demand curve?
Change in demand
All other factors affecting demand except the price of the good itself
Individual demand curve
The demand curve of an individual buyer.
This can be a consumer firm or government
Horizontal summing for the individual demand curves
The sum of the x axis of individual demand curves are added up to put on the market demand curve for the entire market.
Individual Demand
The amount an individual or single firm will buy at each price
Supply
The amount of goods or services that producers are willing and able to bring onto the market and sell at different prices per period of time Ceteris paribus
Describe the relationship between supply and price
Price and Quantity demaned have a direct relationship
What factors affect movement of the supply curve?
Only the price of the good itself
What factors affect shifts in the supply curve?
change in supply
all factors except the price of the good itself
What causes expansion of the supply curve?
Increase in the price of the good
What causes contraction of the supply curve?
Decrease in the price of the good itself
Define
Equilibrium
State of rest with no tendency to change
State
Law of supply
ceteris paribus more goods will be supplied onto the market at a higher price than at a lower price
State
Law of demand
More goods will be demanded at a lower price
What is excess supply?
Any price above the equilibrium price
What is excess demand?
Any price below the equilibrium price
What is equilibrium price?
The price at which supply is equal to demand because the market is always in equilibrium