2.4 Price Flashcards
• explain price as a reflection of worth and its role in determining an efficient distribution of resources • explain what is meant by equilibrium price and quantity • draw and analyse the interaction of demand and supply • explain the role of markets in the determination of price and the allocation of resources • analyse how the market forces of demand and supply affect equilibrium price and quantity (12 cards)
What does the term ‘price’ mean?
The sum of money paid by a consumer to a producer for a good or service. It is determined by the interaction of supply and demand.
What does the term ‘efficiency’ mean?
The optimal production and distribution of scare resources.
What are the 3 important functions price fulfils in determining the efficient distribution of resources?
- Signalling
- Transmission on preference
- Rationing
What does the term ‘signalling’ mean?
Price change to signal where resources are needed. If prices rise, this shows more resources are required, whereas if they fall then fewer are needed.
What does the term ‘transmission of preferences’ mean?
Through their economic choices producers can send information to resource suppliers about their changing needs to fulfil consumer’s current needs and wants.
What does the term ‘rationing’ mean?
Prices help to ration scare resources when demand outstrips supply causing price to rise so that only those who are willing and able to pay the price are allocated the resources.
What does the term ‘equilibrium price and quantity’ mean?
Where quantity demanded exactly matches the quantity supplied
What does the term ‘determination of price’ mean?
The interaction of the free market forces of demand and supply to establish a general level of price for a good or service.
What does the term ‘excess supply’ mean?
If price is set above the equilibrium price, supply exceeds demand and so some of the goods and services are left unsold.
What does the term ‘excess demand’ mean?
If price is set below the equilibrium price, demand exceeds supply as many sellers will be unwilling or unable to supply at that price and so some buyers are unable to purchase the product.
What does the term ‘allocation of resources’ mean?
How scarce resources are distributed among producers, and how scarce goods and services are allocated among consumers.
What does the term ‘market forces’ mean?
Factors that determine price levels and the availability of goods and services in an economy without government intervention.
