How prices are established in free markets: consumers and producers decide / demand and supply.
Effective demand: the amount consumers are willing and ABLE to purchase at a given price per period of time.
Demand curve: downward sloping, shows inverse relationship between price and quantity demanded. (price/quantity demanded)
If it’s not price-related, it’s a shift in the demand curve.
Factors affecting demand (not price):
-level of income: whether the good/service is normal or inferior (!!as living standards rise, normal products can become inferior!!)
-price of substitute goods: goods that can be easily replaced - (eg. price of pepsi increases, so you buy coke. Increase in pepsi price, increase in coke’s demand.)
-price of complementary goods: as demand for one product rises, so does demand for another (e.g. cars, tires; if one of these prices go up, the demand for both of them will decrease)
-tastes and fashions: when preferences for a product change favorably (e.g. clothes)
-population size/structure (more people, more demand for certain products)
-taxation on disposable income
-shows the amount producers are willing and able to supply at various prices and are drawn assuming other factors affecting supply remain constant (ceteris paribus).
-more will be supplied at higher prices than at lower prices (profit maximization)
Factors affecting supply (not price):
-competitiveness of the market (too crowded/saturated)
-changes in cost of production (price of FOPs)
-speculation on price
-weather and other things (E.g. wars, strikes, disease)
-government policies e.g. taxes (may raise costs) and subsidies (reduce costs)