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Economics > Price Mechanism > Flashcards

Price Mechanism Flashcards

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1
Q

What is the definition of demand?

A

Amount that consumers are willing and able to purchase at each given price over a given period of time

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2
Q

What is the definition of supply?

A

Amount of a good/service that producers are willing and able to offer for sale at each given price over a given period of time

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3
Q

What does the law of demand state?

A

Quantity demanded of a good/service is inversely related to its price, ceteris paribus

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4
Q

What is the income effect?

A

Increase in price leads to a fall in real income/purchasing power, so their ability and willingness to buy the goods will fall

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5
Q

What is the substitution effect?

A

Increase in price leads to substitutes becoming relatively cheaper, so consumers will switch to substitutes and buy less of the good/service

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6
Q

What is the shape of the demand curve?

A

Demand curve is downward sloping

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7
Q

What influences the individual demand curve?

A

Individual demand curve influenced by Law of Diminishing Marginal Utility (LDMU)

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8
Q

What influences the market demand curve?

A

Market demand curve influenced by Law of Demand

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9
Q

What is the shape of the supply curve?

A

Supply curve is upward sloping

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10
Q

What influences the individual supply curve?

A

Individual demand curve influenced by Law of Diminishing Returns (LDMR)

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11
Q

What is the market supply curve?

A

Market demand curve is the horizontal summation of firms’ supply curves

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12
Q

List the determinants of demand.(7)

A
  • Tastes and preferences
  • Seasonal changes/climatic changes
  • Expectations of future prices
  • Income — Normal goods vs inferior goods
  • Prices of related goods
  • Government policies
  • Population — Size and demographics
  • Interest rates
  • Exchange rates
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13
Q

What are substitutes?

A

Goods that are in competitive demand because they can be used in place of another

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14
Q

What are complements?

A

Goods that are jointly demanded to satisfy the same want

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15
Q

What is derived demand?

A

Demand for one good that occurs as a result of the demand for another intermediate/final good

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16
Q

How does an increase in demand affect equilibrium price and quantity?

A

Equilibrium price increases and equilibrium quantity increases

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17
Q

What happens when there is a shortage?

A

At the same price, quantity demanded increases while quantity supplied decreases

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18
Q

What happens when there is a surplus?

A

At the same price, quantity supplied increases while quantity demanded decreases

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19
Q

Explain the effect of a price increase on consumer behavior.

A

Consumers’ willingness and ability to purchase the good falls due to income and substitution effects

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20
Q

What is price elasticity of demand (PED)?

A

A measure of the degree of responsiveness of the quantity demanded of a good to a change in its price, ceteris paribus

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21
Q

What does a PED value of |PED|<1 indicate?

A

Price inelastic demand

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22
Q

What does a PED value of |PED|>1 indicate?

A

Price elastic demand

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23
Q

What does a PED value of |PED|=0 indicate?

A

Perfectly price inelastic demand

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24
Q

What does a PED value of |PED|=∞ indicate?

A

Perfectly price elastic demand

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25
What is income elasticity of demand (YED)?
A measure of the degree of responsiveness of the quantity demanded of a good to a change in consumers’ income, ceteris paribus
26
What does a YED value of YED<0 indicate?
Inferior good
27
What does a YED value of YED>0, |YED|<1 indicate?
Normal good — Necessity
28
What does a YED value of YED>0, |YED|>1 indicate?
Normal good — Luxury
29
What is cross elasticity of demand?
A measure of the degree of responsiveness of the quantity demanded of a good to a change in the price of another good, ceteris paribus
30
What does a large CED value with CED<0 indicate?
Strong complements
31
What does a CED value of CED>0 indicate?
Strong substitutes
32
What is price elasticity of supply (PES)?
A measure of the degree of responsiveness of the quantity supplied of a good to a change in its price, ceteris paribus
33
What does a PES value of |PES|<1 indicate?
Price inelastic supply - Increase in price leads to a less than proportionate increase in supply, vice versa
34
What does a PES value of |PES|>1 indicate?
Price elastic supply - Increase in price leads to a more than proportionate increase in quantity supplied, vice versa.
35
What are indirect taxes?
Taxes on goods and services levied indirectly on consumers that are paid to the authorities by suppliers of the goods and services
36
What is a direct tax?
Taxes levied on consumers (income and wealth) that are paid to the tax authorities directly
37
What is the effect of an indirect tax on supply?
Decreases supply as producers are only able to sell a smaller quantity of a good at each given price
38
What is the effect of a direct subsidy on demand? (prose)
Increase households’ disposable income and purchasing power, so households are more willing and able to consume goods
39
What happens when a direct tax is imposed?
Decreases demand as households' disposable income falls and consumers are less willing and able to consume goods
40
What is deadweight loss?
Part of the losses in consumer/producer surpluses that were transferred to the government as an increase in tax revenue, but the losses were not fully recouped
41
What happens to demand when households' disposable income falls?
Decreases demand ## Footnote Consumers are less willing and able to consume goods and services.
42
What is the result of an increase in households' disposable income?
Increases demand ## Footnote Households are more willing and able to consume goods.
43
What is the effect on price and quantity when demand decreases?
Price will fall, Quantity will decrease ## Footnote This reflects the inverse relationship between demand and price.
44
What is the effect on price and quantity when demand increases?
Price will increase, Quantity will increase ## Footnote This reflects the direct relationship between demand and price.
45
What is a minimum price?
Price floor, set above the market equilibrium price ## Footnote Aimed at protecting producers' incomes.
46
What is a maximum price?
Price ceiling, set below the market equilibrium price ## Footnote Aimed at helping consumers by making goods more affordable.
47
What happens to quantity demanded when a minimum price is set?
Quantity demanded decreases ## Footnote Higher prices lead to lower demand.
48
What happens to quantity supplied when a minimum price is set?
Quantity supplied increases ## Footnote Producers are incentivized to supply more at higher prices.
49
What is created as a result of a minimum price?
Surplus created ## Footnote When quantity supplied exceeds quantity demanded.
50
What is the effect of a maximum price on quantity supplied?
Quantity supplied decreases ## Footnote Producers are less willing to supply at lower prices.
51
What is the impact of a maximum price on quantity demanded?
Quantity demanded increases ## Footnote Lower prices lead to higher demand.
52
What is a quota?
Limit on the quantity produced imposed through legislation ## Footnote Set below the market equilibrium quantity.
53
What is the effect of a quota on the allocation of resources?
Reduction in allocation of resources to the production of good ## Footnote This creates scarcity in the market.
54
What is the effect on consumer surplus when a quota is in place?
Consumer surplus falls ## Footnote Prices increase and quantity consumed decreases.
55
What are determinants of labour demand?
Demand for final goods and services, productivity of labour ## Footnote More productive labour increases demand for labour.
56
What are determinants of labour supply?
Immigration, changes in educational attainment, alternative employment opportunities ## Footnote Factors affecting the availability of labour.
57
What effect does minimum wage have on the labour market?
Government intervention affecting price of labour ## Footnote Can lead to unemployment if set above equilibrium.
58
True or False: A price ceiling always leads to a surplus.
False ## Footnote A price ceiling typically leads to a shortage.
59
Fill in the blank: Deadweight loss to society occurs when there is _______.
allocative inefficiency ## Footnote This results from market distortions like price controls.
60
What is the role of government in addressing market failures?
Implementing policies to correct inefficiencies ## Footnote May include subsidies, taxes, or regulations.
61
What is the effect of a higher minimum price on surplus?
Larger surplus ## Footnote Greater price elasticity of demand/supply increases surplus.
62
What does effective government policy evaluation include?
Desirability, sustainability, feasibility, comparison between policies ## Footnote Assessing the impact of policies on welfare and equity.
63
What is the relationship between wage differentials and labour supply?
Differences in skills affect demand for labour ## Footnote More skilled workers may command higher wages.

Economics (3 decks)

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