Flashcards in Chapter 2: The determination of prices Deck (47):
What is the law of demand?
More of a good will be demanded the lower its price and vice versa.
What is effective demand and does the demand curve illustrate this?
How much consumers are willing and able to buy at a given price and the demand curve does illustrate this.
What are determinants of demand?
Factors that can affect the demand for a product
What are the determinants of demand?
Advertising (as it can influence tastes), the price of substitutes, the price of complements, a rise or fall in individuals' income, population size and providing credit as it may lure potential customers.
What is the ceteris paribus assumption?
Drawing the demand curve means that you have assumed that all other factors remain constant as a demand and supply diagram has only two axis.
How does a change in any of the determinants of demand affect the demand curve?
It shifts the demand curve which leads to an increase or decrease in the quantity demanded.
How will a change in price affect the quantity demanded?
It will lead to movements along the demand curve which results in extensions and contractions in quantity demanded.
What is consumer surplus?
The difference between what consumers are willing to pay for a good or service above what they actually pay.
What is the basic principle behind the supply curve and why?
More of a product will be supplied at a higher price than at a lower price as firms want to make profit.
What does 'determinants of supply' mean?
The other factors besides price that affect supply.
What are some determinants of supply?
Costs of production, technology, subsidies, taxes (they discourage production), government legislation and weather.
What is producer surplus?
The difference between the price that producers are willing to supply a good for below the price they actually receive.
What will an outward shift of the supply curve cause?
A fall in market price and a rise in equilibrium quantity which leads to an increase in the amount of producer surplus.
When do shortages occur?
When the price is below the equilibrium level.
When does equilibrium occur?
The point at which demand and supply curves intersect.
How can you calculate total revenue?
Quantity x price
What is speculative buying?
When you buy something just so that you can sell it for more and make a profit.
How do demand curves usually slope?
Downwards from left to right.
What do changes in price alone lead to in terms of the supply curve?
Movements along the supply curve.
What will a change in one of the determinants of supply lead to?
It will shift the supply curve.
What would happen if the costs of production were to increase?
No individual can pass the increased costs to the consumers in the form of higher prices as this will mean they won't be able to sell their products so producers will be less willing to supply as much as before.
Why does an increase in technology shift the supply curve out?
It increases production because innovations make our existing stock of resources work harder.
What are subsidies?
Grants provided by the government to the suppliers of goods.
How do subsidies affect the supply curve?
They artificially reduce the costs of production for suppliers so they cause the supply curve to shift outwards.
How do taxes affect the supply curve?
They have the effect of discouraging production as they raise the costs of production so the supply curve shifts inwards.
How can government legislation affect the supply curve?
At one extreme, banning the production of a commodity will totally eliminate supply. However measures like tough anti-pollution controls can raise costs of production and therefore shift the supply curve inwards.
How can weather affect the supply curve?
Weather only affects the supply of agricultural commodities. Favourable weather conditions can producer a bumper harvest and vice versa. A good harvest will shift the supply curve outwards.
What is meant by a 'surplus' of a product?
More of it is supplied and less of it is demanded.
What will happen in the long run when there is a surplus or a shortage?
The price will be forced back down or back up to the equilibrium level.
What three factors is the demand for labour determined by?
Wages, the demand for the product and the productivity of labour.
Why do firms and businesses demand labour?
In order to produce goods and services.
In the labour market demand and supply diagram, what is on the x and y axis?
Wage is on the y axis and quantity of labour is on the x axis.
Why does the demand curve slope downwards in the labour market?
Firms demand more labour as wages fall and vice versa.
What will a change in wages lead to?
A movement along the demand curve.
What causes a shift in the demand curve in the labour market?
A change in either the demand for a product or the productivity of labour.
Why is demand for labour a derived demand?
When the demand for a product rises, the demand for the labour that makes it will rise too.
What is the productivity of labour defined as?
The output per worker.
Why does the productivity of labour have a significant effect on the demand for labour and demonstrate this with an example?
At any given wage, if productivity rises, the firms will be willing to employ more workers e.g. performance-related pay shows how firms are willing to pay workers who are more productive.
Why does the supply curve slope upwards in the labour market?
More labour will be supplied at higher wages and vice versa as the existing workforce might be prepared to work longer hours or individuals might be tempted into an occupation from other industries or from the pool of unemployment.
What does a change in wages lead to in terms of the supply curve?
A movement along the supply curve.
What is a share?
A divided-up unit of the value of a company.
What happens when the overall value of a company fluctuates?
The share price will change.
What does a stock exchange do?
It buys and sells second hand shares.
Why do share prices change so much?
To reflect changes in market conditions.
What are the reasons that share prices may fall?
Stiff competition from rivals.
What might a discovery of a profitable new oil field lead to?
It might encourage investors to buy shares in an oil company and therefore cause an increase in demand.