Micro 3

Question 1

Price mechanism

Answer 1

Process in a market economy where consumers and producers interact to determine the allocation of scarce resources

Question 2

3 main price mechanism

Answer 2

1. Signalling function
2. Incentive function
3. Rationing function

Question 3

How does signalling function work?

Answer 3

• Consumers signal to producers on the qty to produce by increasing demand on goods through casting dollar votes
• Demand increases from D1 to D2. At initial price at P1, there will be a shortage
• Thus, leading to a upward pressure on price
• This will then signal to producers to allocate more resources to increase production of goods and services due to possibility of earning greater profits
• Quantity sold increases from Q1 to Q2

Question 4

How does incentive function work?

Answer 4

• producers are competing for spending votes of consumers
• consumers buy from producers which offer a lower price
• producers will be incentivised by the profits
• find a lower cost production method

Question 5

How does rationing function work?

Answer 5

• Prices ration goods to comsumers who are willing and able to pay
• depends on the income, prices and preferences
• increase in price drives out people who are unable or unwilling to pay
• decrease in qauantity demanded

Question 6

Price of substitute falls

Answer 6

Decrease in demand of good due to change in price of related good/substitute.
- Demand curves shift left

Question 7

Population rises

Answer 7

Change in population, change in number of consumers

- Demand increases

Question 8

Taste shift away from good due to strong advertising

Answer 8

Change in taste and preferences

- Decrease in demand

Question 9

Price of complementary good falls

Answer 9

Change in price of related good

- Increase demand of good

Question 10

The good increase in price

Answer 10

The price of good changes directly.

- Shift along the demand curve, quantity demanded decreases

Question 11

Demand

Answer 11

Quantity of goods and services the consumer is willing and able to pay at various prices per period time, ceteris paribus

Question 12

Supply

Answer 12

The quantity of goods and services the producer is willing and able to supply at various price per period time, ceteris paribus

Question 13

Cost of raw material falls

Answer 13

Decrease in cop
Increase in potential profits
- increase supply, supply shift right

Question 14

Alternative products become more profitable

Answer 14

Change in expected price of goods
Other products is more profitable
- Decrease in supply of good

Question 15

Related goods

Answer 15

Affecting supply
1. competitive supply
2. Joint supply
Affecting demand
1. Complement
2. Substitutes

Question 16

Substitutes

Answer 16

Good that fulfill the same needs and wants

Question 17

Complements

Answer 17

Goods that are consumed together to perform the same purpose

Question 18

Competitive supply

Answer 18

Two goods are produced from the same resources, such that the resources used in one good cannot be used to produce the other good

Question 19

Joint supply

Answer 19

2 goods are produced jointly by the same resources

Question 20

Derived demand

Answer 20

The demand of good is dependent on the demand of the good that uses it(fop)