The quantity suppliers wish to sell is exactly equal to the quantity customers wish to buy and the market clears
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What are the signals that guide the allocation of resources?
Prices
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When does excess demand occur?
When the quantity demanded outstrips the quantity supplied i.e. the price is too low for the market to clear
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When does excess supply occur?
When the quantity supplied is greater than the quantity demanded i.e. price is too high for the market to clear
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When there is excess demand how do market forces restore equilibrium?
Customers will be willing to pay more for the product; suppliers will raise the price and still sell the product and more suppliers will enter the market because of the increased profit margin
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When there is excess supply how do market forces restore equilibrium?
Suppliers will cut prices to sell goods; more consumers will buy the good at the lower price; fewer suppliers will be willing to produce because of reduced profit margins
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What are the limitations of the supply and demand model?
It assumes businesses and consumers have full information when making economic decisions; it assumes all markets are competitive; it relies on all other things being equal (ceteris paribus)
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What does the profit-signalling mechanism ensure?
That businesses do not for long produce goods and services that do not sell and instead follow the incentive to focus on products that will generate profit because customers want to buy them
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How does rationing signal how resources are allocated?
Consumers can only buy the goods and services they pay for, therefore the economy is distributed according to how much the buyer can pay so products go to the highest bidder so goods are rationed according to buyers' ability to pay
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How does profit act as signal for suppliers?
It acts as an incentive because it makes it worthwhile for businesses to use resources to produce the most popular product, thus more businesses will want to join the market because of the incentive
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What is consumer sovereignty?
The role of the consumer in determining the allocation of resources; by buying what they want the most consumers send a signal to producers about their preferences
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What can interfere with the profit-signalling mechanism?
Assuming all markets are competitive because companies tend to try and keep costs and prices low so they can keep the market power
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What is a mass market?
A very large market with a high sales volume that targets a large segment of the market. Production takes place on a larger scale and thus enjoys economies of scale
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What is a niche market?
A small part of the overall market that focuses on a small market segment
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What is market growth?
It implies an increase in the demand for a product
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Other cards in this set
Card 2
Front
What are the signals that guide the allocation of resources?
Back
Prices
Card 3
Front
When does excess demand occur?
Back
Card 4
Front
When does excess supply occur?
Back
Card 5
Front
When there is excess demand how do market forces restore equilibrium?
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