1.1 Compeitive Market Demand And Supply Flashcards Preview

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Flashcards in 1.1 Compeitive Market Demand And Supply Deck (47):

What is a market?

Any place where transactions take place between buyers and sellers. Scarcity must excise for a market to exist.


What is demand?

The willingness and ability of customers to pay a certain price in a market to obtain a particular good or service.


What is the law of demand?

The quantity demanded for a good or service falls as its price rises ceteris paribus.


What does the demand curve show?

The inverse relationship between price and quantity demanded of a product.


What are the three causes of the negative relationship between price and quantity demanded?

The income effect - as price falls the real income of customers rises.
The substitution effect - as the price of a good or service falls more customers are able to pay so they are more likely to buy the product.
Diminishing marginal returns - as people consume more of a particular food or service the utility gained from the marginal unit declines so customers will only purchase more at a lower price.


What is the market demand curve?

Refers to the sum of all individual demand for a product and it is found by adding up all individual demand at each price level.


What are substitutes?

Products that can be used instead of each other.


What are complements?

Products that are jointly demanded.


What is a normal good?

Where the demand for the product increase with an increase in income - these can be both necessities and luxury products.


What is an inferior good?

Has a negative relationship between income and quantity demanded.


What are some factors that shift the demand curve for a good or service?

Habits fashion and tastes.
Substitutes and complements.
Government policies.


How do habits and fashion shift the demand curve?

Products that become fashionable cause an increase in demand whereas unfashionable items reduce the level of demand.


How does income affect demand?

Higher levels of income mean that customers are able and willing to buy more goods and services.


How do substitutes and complements affect demand?

If the price of a product falls then it is likely that the demand for the substitute will fall. If the price of a product increases then the demand for the complementary good will fall.


How does advertising affect demand?

Marketing messages are used to inform, remind and persuade customers to buy a firms products so effective advertising can be used to increase demand.


How do government policies affect demand?

Rules and regulations can affect the demand for certain products - legal age on drinking can reduce demand, subsidies on education and energy efficient cars can increase demand.


How does the economy affect demand?

Whether the country is in a recession or boom has a huge impact on the spending patterns of the population.


What causes a movement ALONG the demand curve?

A change in the price of a good or service.
A price rise will cause a contraction in the quantity demanded for a product.
A price fall will cause an expansion in the quantity demanded for a product.


What causes a SHIFT in the demand curve?

A change in non price factors that affect demand.
An increase in demand is shown by a rightwards shift in the demand curve.
A decrease in demand is shown by a leftwards shift in the demand curve.


What is supply?

The willingness and ability of firms to provide a good or service at a given price level per time period.


What is the law of supply?

There is a positive relationship between the quantity supplied of product and its price ceteris paribus.


Why is there a positive relationship between price and supply?

Existing firms in the market can earn higher profit margins if they supply more.
More firms enter the market as higher prices allow them to cover production costs.


What is market supply?

The sum of all individual producers supply curves at each price level.


What causes a movement along the supply curve?

Caused by price changes which changes the quantity supplied.


What causes a shift of the supply curve?

Caused by changes in non price facts that affect supply. Rightwards shift shows an increase in supply a leftwards shift shows a decrease in supply.


How is supply affected by costs of production?

Changes in any cuts of production will cause a shift in supply.


How is supply affected by taxes?

Indirect taxes are imposed on the supplier of a product which adds to the cost of production hence taxes tend to reduce market supply.


How is supply affected by subsidies?

Financial assistance from the government to help encourage output by reducing costs of production for products that are beneficial to society as a whole.


How is supply affected by technological process?

Advances in technologic means that there can be greater levels of output at every price level.


How is supply affected by expectations?

Price acts as a single to producers to move their resources to the provision of product with greater profitability thus expectations of price movements affect supply.


How is supply affected by competitive supply?

The output of a product takes place as an alternative to other products based on the relative profitability of these products.


How is supply affected by joint supply?

The output of one product routinely leads to the supply of another.


How is supply affected by barriers to entry?

The number of firms in the market determined by the nature of barriers to entry to the industry can affect the level of supply.


How is supply affected by time?

Supply tend to be lower in the short run but can increase over time.


How is supply affected by weather?

The output of some products such as agricultural products depends on the weather.


What is market equilibrium?

Occurs when the quantity demanded of the products is equal to the quantity supplied of the product.


When is there excess supply?

When the price is set above the equilibrium - a surplus exists.


When is there excess demand?

When the price is set below the equilibrium - a shortage exists.


What happens when there is excess demand and excess supply?

If there s excess supply there is a tendency for price to fall to remove the surplus.
If there is shortage in the market the price will tend to rise to remove the excess demand.


Why is there a scarcity situation?

Resources are finite whilst wants a infinite which imposes production choices about what to produce.


What leads to opportunity costs?

Due to limited resources economic agents have to make choices.


What function does price have in the market economy?

It has a signalling function and an incentive function, these functions realist in t he reallocation of resources if price changes due to changes that affect the demand for or supply of a product.


What is consumer surplus?

Refers to the benefits to buyers who are able to purchase a product for less than they are willing to do so.


What is producer surplus?

Refers to the difference in price between the price the firms actually receive and the price they were willing and able to supply at.


What is allocative efficiency?

When resources are distributed so that consumers and producers get the maximum possible benefit which means no one can be made better off without making someone else worse off.


What is social surplus?

The sum of producer and consumer surplus.


When does allocative efficiency occur in a competitive market?

At market equilibrium became both consumer and producer surplus are maximised at this point.