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The Price Mechanism
Terms in this set (31)
the quantity of a good or service that consumers are willing and able to buy at various prices
Law of Demand
the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises and vice versa
graph showing the quantity demanded at each and every possible price that might prevail in the market at a given time
Non-price determinants of demand
The variables (other than price) that can influence demand, and that determine the position of a demand curve; a change in any determinant of demand causes a shift of the demand curve, which is referred to as a 'change in demand'.
a good for which, other things being equal, an increase in income leads to an increase in demand
a good for which, other things being equal, an increase in income leads to a decrease in demand
Products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises.
when two goods are usually bought together. When the price for one of these good goes up, the consumes is less likely to buy the second good.
the quantity of a good or service that businesses are willing and able to provide at any given price on the market
law of supply
the claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises
a graph showing the various quantities supplied at each and every price that might prevail in the market
determinants of supply
Anything other than price of the current item that influences production decisions, including cost of raw materials, cost of labor, level of technology used to produce, number of producers in the market, price of related products, and expected future price.
Taxes placed on a good or service; these affect costs, and subsequently, supply.
Taxes paid directly to the government tax authorities by the taxpayer, these affect income, and subsequently, demand
a sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive.
supply function (HL only)
is the relationship between quantity supplied (Qs) and price. The relationship can be shown mathematically as an equation:
Qs= c - dP
The term is a constant representing the non-price determinants of supply. A change in c will shift the whole supply curve to the right or left, while a change in d will change the slope (elasticity) of the supply curve.
demand function (HL only)
is the relationship between quantity demanded (Qd) and price. The relationship can be shown mathematically as an equation:
Qd= a - bP
The term is a constant representing the non-price determinants of demand. A change in a will shift the whole demand curve to the right or left, while a change in b will change the slope (elasticity) of the demand curve.
a situation in which the market price has reached the level at which quantity supplied equals quantity demanded
Shortage/ Excess Demand *
when a price is below equilibrium causing quantity demanded to be greater than quantity supplied
Surplus/ Excess Supply *
when a price is above equilibrium causing quantity demanded to be less than quantity supplied
The Invisible Hand
Adam Smith's term for the natural self-regulation of a market economy driven by self-interest and efficiency.
forces, such as supply and demand, that drive the terms of transaction in capitalism
Price Mechanism *
The natural forces that guide the market towards efficient distribution of goods and services
Indication of over- or underproduction of a good or service in a market. Rising prices signal a shortage; lowered prices signal overproduction
Incentive Function of Price Increases
a rising price gives producers the incentive to increase the quantity supplied, as the higher price may result in higher revenues.
Disincentive Function of Price Decreases
a falling price causes producers to decrease quantity supplied, as the opportunity cost of producing that good is increasing. They will likely begin to produce more of other goods.
Reallocation of resources
The response to changes in price that cause producers to make different choices related to the question "What goods will we produce?"
Consumer Surplus *
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
Producer Surplus *
the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives
Community Surplus/ Social Surplus *
the sum of consumer and producer surplus; the total benefit to society, this is maximised at equilibrium.
Allocative Efficiency *
Occurs at equilibrium; when the marginal benefit to society from consuming a good is equal to the marginal cost to society for producing a good
In a company using the cost leadership strategy, a human resources value-creating activity would be:
Converting the federal income tax brackets to a flat tax would:
If a firm produces, it should produce at the output level where
Returns to Scale (Economies of scale)
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