2.4 Price Flashcards
(9 cards)
price
The sum of money you have to pay for a good or service. It is determined by the interaction of supply and demand.
worth (vs price)
Worth is how much you value something. It can vary between different people, due to fashion or in different situations, even though the price is constant.
efficiency
optimal production and distribution of scarce resources
3 roles of price
signalling (rise in price shows more resources are required - eg green energy)
transmission of preferences from producers to resource suppliers (higher prices encourage suppliers to supply more, or if prices are too low suppliers may withdraw from the market)
rationing (if resources are scarce, the price rises, so that only those willing and able to pay the price are allocated the resources - eg football stadiums)
equilibrium price and quantity
where quantity supplied exactly matches quantity demanded - price unlikely to change given the current conditions
analyse effect of increase in consumer incomes (w/ graph)
The increase in incomes has resulted in an outward shift of the demand curve from D to D1 because consumers can now afford to buy more goods. This has led to a rise in price from P to P1 and an increase in the quantity demanded and the quantity supplied from Q to Q1. The increase in incomes has meant that consumers can buy more of the good/s, but have to pay a higher price.
role of markets in the determination of price
determination of price is the interaction of the free market forces of demand and supply to establish the general level of price for a good or service.
some times seller sets the price: shops
- if buyer does not like price they will go elsewhere, if enough buyers do this seller will have to reduce price due to excess supply
or can be negotiated between buyers and sellers directly: car exchange
- wont accept first price, but will negotiate for a deal I am prepared to pay and the car dealer is prepared to give
role of markets in allocation of resources (consumer sovereignty)
In a market system scarce resources are rationed (see Chapter 1.2), incentives are given to producers to supply more and signals are offered to both producers and consumers and to the owners of factors of production (see Chapter 2.7). These signals can be seen working in the cases of excess demand and supply
In a market economy consumers will have the power to influence resource allocation. Their spending decisions will send signals to the producers about what goods to produce and how many to produce. If they are prepared to pay more, suppliers will move scarce resources to the production of that good. Equally, if they are only prepared to pay less (excess supply), then producers will move resources away from that good.
This power of consumers to influence how the market allocates resources is called consumer sovereignty: in other words, consumers determine what is produced and for whom it is produced and thus rule the market (see Chapter 1.2). The market system, therefore, is a means of achieving the efficient allocation of resources.
how do market forces affect eq price and q
Market forces are those that determine price levels and the availability of goods and services in an economy without any government intervention (see Chapter 3.8). Market forces push prices up when either demand rises or supply falls. Equally, market forces drive them down when demand decreases or supply increases. As we have seen, when the two are equal the market is in equilibrium.
