Week 4 - types of economies, money, demand and supply Flashcards
Define effective demand
Demand for a good or service from consumers that is backed up with an ability to pay
Define potential demand
Not yet expressed in market place because consumers do not have the ability to pay
Define demand
The quantity that purchases are willing and able to buy at a given price in each time period
What does the law of demand state?
Demand varies inversely with price - lower prices make products more affordable, while higher prices reduce demand.
What does a fall in market price cause?
An extension in demand.
What does a higher price lead to?
A contraction in demand
What does a change in the market price of a product lead to?
A movement along the demand curve (not a shift!)
Which way sloping is the demand curve?
Downward sloping
Give two reasons why the demand curve is downward sloping
Income effect and the substitution effect
Explain the income effect
A fall in prices = increases real purchasing power of consumers = allows people to buy more with their budget = for normal foods demand rises with an increase in real income as people now have higher purchasing power
Explain the substitution effect
A fall in price of good X makes it relatively chapter compared to substitutes (good y) = some consumers will switch to good X leading to higher demand.
What causes a shift in the demand curve?
Factors other than the price of the product
Demand curve shifting outwards shows what?
More is demanded at each market price
Demand curve shifting inwards shows what?
Less is demanded at each market price
Give the causes of shifts in the demand curve
PASIFIC - population, advertising, substitutes, interest rates, fashions, income, complements
Define derived demand
Derived demand is demand for a factor of production used to produce another good or service
Give an example of derived demand
Wood is a product where a lot of demand comes from the uses to which it can be used e.g. fencing
Define joint demand
When demand for one product is directly and positively related to demand for a related good or service - two products are complements.
Give an example of joint demand
Fish and chips
Define composite demand
Where goods have more than one use. An increase in the demand for one product leads to a fall in supply of the other.
Give example of composite demand
Mile - it can be used for cheese, cream, butter etc.
What are shifts of the supply curve caused by?
Changes in the conditions of supply
What are the conditions of supply?
PINTSWC - Productivity, Indirect Taxes, Number of Firms, Technology, Subsidies, Weather, Costs of Production
What is joint supply?
Where an increase or decrease in the supply of one good leads to an increase or decrease in supply of a by product
Give an example of joint supply
A contraction in the market supply of lamb will lead to a reduced supply of wool
What does equilibrium mean?
State of balance between market demand and supply. The equilibrium market price is the price at which the market for the product clears.
What do we call it when demand and supply are out of balance?
Disequilibrium.
What is excess demand?
When quantity demanded exceeds available supply. It happens when the current market price is below the equilibrium price.
What does excess demand lead to?
Queuing and upward pressure on price = demand is rationed by higher prices = an expansion of supply as producers respond to incentive for higher profits
What does excess supply mean?
The market price is above the equilibrium
What does excess supply lead to?
Unsold goods = downward pressure on market price = prices fall = extension in demand = lowers the supply surplus = take the market back towards an equilibrium
Give the four functions of money
A medium of exchange; a store of value; a unit of account; a standard of deferred payment
What does medium of exchange mean?
it facilitates transactions between buyer and seller
what does a store of value mean?
an asset that holds value over time
Give two problems with a centrally planned system (a command economy)
weak profit incentives for businesses; system is unresponsive to consumers
Give two advantages of a free market system
Competition drives innovation; the profit motive stimulates investment = lower prices for consumers
Give 2 features of the free market system
markets allocate scarce resources; private sector is dominant
What is a mixed economy
A mix of private and state ownership of businesses - the nature of the mix will vary from country to country
Which thinker favoured the command economy
Marx
Which thinker argued self interest has social benefits?
Adam Smith
Which thinker - other than Smith - favoured a small government and laissez faire economics?
Hayek
