Price Mechanism Flashcards
State the Law of Demand
Law of Demand states that there is an inverse relationship between the price and the quantity demanded of a good, ceteris paribus.
State the Law of Diminishing Marginal Utility
It states that beyond a certain point of consumption, as more units of a good or service are consumed, the additional utility a consumer derives from successive units decreases.
What are Inferior goods?
Inferior goods have a negative relationship between income of consumers and demand of goods and services.
What are related goods?
They are substitutes and complements. Substitutes are goods in competitive demand while complements are goods in joint demand.
How can hot weather affect the market equilibrium for ice-cream? (10mark essay qu example)
Initially, the market equilibrium price of ice cream is at P0 and quantity is at Q0. The hot weather affects the demand of the curve by changing people’s taste and preferences towards consuming ice-cream. Hot weather increases the amount of ice-cream people are willing and able to but at every price level, increasing the demand for ice-cream and shifting the demand curve to the right. Shortage occurs due to demand<supply. Upward pressure on price of ice cream. Quantity supplied of ice-cream will increase according to law of supply and quantity of demand will decrease according to law of demand. shortage is reduced as price rises. Price continues to adjust until quantity of demand will equal the quantity supplied at new equilibrium.
What are normal goods?
Normal goods are goods that have a positive relationship between demand of goods and services and income of consumers.
What is joint supply?
Goods are in joint supply where the productive of more of one good leads to the production of the second good.
What is competitive supply?
Two goods are in competitive supply where an increased production of one goods means diverting resources away from the production of the other.
What is Consumer Surplus?
Consumer gain if the value of an additional unit consumed is greater than the actual price paid to obtain the unit. This happens when the consumer pays an amount lesser than what he or she is willing and bale to pay for a given quantity of the good, they reap consumer surplus.
What is Producer Surplus?
Producer Surplus is defined as the difference between the amount a producer is willing and able to be paid for a good and the amount he actually receives.
Define Price Elasticity of Demand
Price elasticity of demand measure the responsiveness of the quantity demanded of a good to change in price of the good.
What does price elastic demand mean?
When the demand for a good is price elastic, a rise in price results in a more than proportionate fall in quantity demanded, ceteris paribus. PED is greater than 1.
What does price inelastic demand mean?
When the demand for a good is price inelastic, a change in price will result in a less than proportionate change in quantity demanded. PED is between 0 and 1
What is unitary elastic demand?
Unitary elastic demand occurs when a change in price results in a proportionate change in quantity demand.
What is Perfectly Price Elastic Demand?
Demand is perfectly price elastic when a very minimal change in price leads to an infinite change in quantity demanded. Demand is a horizontal line
