AOS1 Flashcards
(22 cards)
Market
Is any type of arrangement that facilitates the exchange between buyers and sellers. A market does not have to be a physical space but instead must ensure is allows to buyers and sellers to interact.
What are the 2 conditions to a perfect market?
- No individual buyer or seller has the power to influence price (Price Taking). 2. Products sold in the market are homogenous (similar) = encourages lower prices = ⬆️ competitiveness = ⬆️ efficiecy.
Consumer Surplus
The difference between the price buyers are willing to pay and the market price. Seen as what the consumer receives if they obtain the good or service for less than the maximum price they are willing to pay.
Producer Surplus
The difference between the price the producer is willing to sell the good or service for and the market price. Seen as what the producer receives if they are able to sell the good or service above its economic costs.
Price Mechanism
Refers to the way changing markets and hence the movement in relative prices, coordinate the way resources are allocated in an economy.
Relative Prices
The prices of products associated with other products. Changes in relative prices send clear signals to producers and consumers and therefore direct resources to their most profitable ends.
Law of Demand
States that there is an inverse relationship between the price and quantity demanded. In simpler terms; as price increases, demand will fall. As prices decrease, demand increases.
Relative Scarcity
The fundamental economic problem where resources are finite compared to the infinite demands placed upon those resources by individuals needs and wants.
Opportunity Cost
The value placed upon the next best alternative that is forgone whenever a choice is made. The cost is not the choice itself but the satisfaction brought by the choice.
What causes the demand curve to shift to the right?
⬆️ disposable income ⬆️ price of substitutes ⬆️ population ⬇️ price of compliments ⬇️ interest rates ⬆️ consumer confidence
What causes the demand curve to shift to the left?
⬇️ disposable income ⬇️ price of substitutes ⬇️ population ⬆️ price of compliments ⬆️ interest rates ⬇️ consumer confidence
Law of supply
States that as price of a product increases, supply will also increase. Conversely, as price decreases, supply will also decrease.
What causes the supply curve to shift to the right?
⬇️ cost of production ⬆️ technology ⬇️ interest rates ⬆️ employee training ⬆️ availability of resources ⬆️ subsidies
What causes the supply curve to shift to the left?
⬆️ cost of production ⬇️ technology ⬆️ interest rates ⬇️ employee training ⬇️ availability of resources ⬇️ subsidies
Demand shifted to the right (graph).
shortage = upwards pressure on price = contraction in demand = expansion in supply
Demand shifted to the left (graph).
Surplus = downwards pressure on price = expansion in demand = contraction in supply.
Supply shifted to the right (graph).
Surplus = downwards pressure on price = contraction in supply = expansion in demand
Supply shifted to the left (graph).
Shortage = upwards pressure on price = expansion in supply = contraction in demand
Price elasticity of demand
The responsiveness of the total quantity demanded of a product to a change in price of that product. Demand curve flattens as PED increases and steepens as PED decreases.
Factors affecting PED
Degree of Necessity - necessities have low PED. Producers can ⬆️ price and demand won’t change too much.
Availability of Supply - more substitutes = higher PED.
Proportion of income - more income needed to pay for a product = higher PED.
Price elasticity of supply
Refers to the responsiveness of the total quantity supplied of a product to a change in the price of a product. Increase in PES will have a flatter supply curve and a decrease in PES will cause a steeper supply curve.
Factors affecting PES
Production period -
