1.2 How Markets Work

HideShow resource information
Rationing Function of the Price Mechanism
Whenever resources are particularly scarce, demand exceeds supply and prices are driven up.
1 of 25
Signalling Function of the Price Mechanism
Rising prices give consumers a signal to reduce demand and signals suppliers to produce more; falling prices give consumers a signal to increase demand, and suppliers the signal to decrease production.
2 of 25
Incentive Function of the Price Mechanism
Higher prices provide an incentive for producers to supply more.
3 of 25
Supply
The volume of goods and services that firms are willing to supply at each price level.
4 of 25
Shifts in the supply curve (PINTS/WC)
Productivity, Indirect tax, Number of firms, Technology, Subsidies, Weather and Cost of production.
5 of 25
Price Elasticity of Demand (PED)
How responsive demand of a product is to a change in price.
6 of 25
PED formula
%change in quantity demanded/ %change in price
7 of 25
Interpreting PED values
Anything below 1 is inelastic, anything above 1 is elastic.
8 of 25
Percent change
Difference/ First figure x 100
9 of 25
Inelastic goods
No substitutes, necessities, addictive
10 of 25
Elastic goods
Luxury, lots of competition
11 of 25
Cross Elasticity of Demand (XED)
This measures how much demand of one product changed following a change in price of another.
12 of 25
XED formula
%change in the Quantity demanded of Product A/ %change in the price of product B
13 of 25
XED interpretation
If XED is positive then the products are substitute, if its negative then the products are complements.
14 of 25
Income Elasticity of Demand (YED)
This measures how responsive demand of a product is to a change in people's income.
15 of 25
YED formula
%change in quantity of demanded/ %change in income
16 of 25
YED interpretation
If YED is positive then goods are classed as normal goods, if YED is negative then goods are classed as inferior.
17 of 25
Price Elasticity of Supply (PES)
This measures how responsive supply is to a change in price.
18 of 25
PES formula
%change in supply/ %change in price
19 of 25
Consumer Surplus
The difference between the price the customer is willing to pay and the price that they do pay.
20 of 25
Producer Surplus
The difference between the actual market price and the price that they were willing to supply at.
21 of 25
Indirect Tax
When tax is applied per unit or volume sold.
22 of 25
Ad Valorem
A tax applied as a percentage of the selling price.
23 of 25
Subsidies
Represents payments to producers by the Government which reduces their production costs.
24 of 25
Factors which influence PES
Transferbility of resources, Short-term or Long-term, How long production takes and How easy it is to stock pile supply.
25 of 25

Other cards in this set

Card 2

Front

Rising prices give consumers a signal to reduce demand and signals suppliers to produce more; falling prices give consumers a signal to increase demand, and suppliers the signal to decrease production.

Back

Signalling Function of the Price Mechanism

Card 3

Front

Higher prices provide an incentive for producers to supply more.

Back

Preview of the back of card 3

Card 4

Front

The volume of goods and services that firms are willing to supply at each price level.

Back

Preview of the back of card 4

Card 5

Front

Productivity, Indirect tax, Number of firms, Technology, Subsidies, Weather and Cost of production.

Back

Preview of the back of card 5
View more cards

Comments

No comments have yet been made

Similar Economics resources:

See all Economics resources »See all Competitive markets resources »