Economics - The Price Mechanism 2023 with verified questions and answers

The law of Demand as the price level increases, the quantity demanded decreases The law of Supply as the price level increases, the quantity supplied increases A market exists where the interaction of buyers and sellers determines the price and quantity of goods and services exchanged. Demand represents the choice making behaviour of consumers ceteris paribus holding other things constant Supply represents the decisions made by producers The law of demand an inverse relationship between the price of a good/service and the quantity of units buyers are willing and able to buy in a defined time period, ceteris paribus. A demand schedule (table) shows the specific quantity of a good/service that people are 'willing' and 'able' to buy at different prices The demand curve has a negative slope The supply curve has a positive slope A change in price causes a change in the quantity demanded and is a movement up/down along the demand curve. A change in demand is an increase/decrease in demand at each possible price level due to a shift in the demand curve. A change in demand is caused by non-price determinants of demand Changes in non-price determinants of Demand causes changes in Demand and is represented as a shift in the demand curve. Normal good any good/service for which there is a direct/positive relationship between changes in income and its demand Inferior good any good for which there is a inverse(negative) relationship between changes in income and its demand Substitute good a good that competes with another good for consumer purchases. Also known as 'alternative' goods. Complementary Good a good that is jointly consumed with another good. Example: Pen + Paper Price increases cause a decrease in the quantity demanded and an upward 'movement' in the demand curve Price decreases cause an increase in the quantity demanded and an downward 'movement' in the demand curve Non-price determinants for demand NIPETS - (N)umber of Buyers, (I)ncome, (P)rice of related goods, (E)xpectations of buyers of future price movements When non price factors change The demand curve shifts An increase in demand shifts the demand curve to the right Favourable changes in non-price factors cause the whole demand /supply curve to shift to the right Unfavourable changes in non-price factors cause the whole demand /supply curve to shift to the left The law of supply A direct relationship between the price of a good and the number of units sellers are willing to offer for sale in a defined time period, ceteris paribus. The supply schedule (table) shows the quantity of a good or service that firms are willing and able to offer for sale at different prices. A change in the quantity supplied is a movement between points along a stationary supply curve. It is caused by a change in price. A change in supply is an increase or decrease in supply at each possible price due to a shift in a supply curve. It is caused by non-price determinants of supply Changes in supply occur when non-price factors(determinants) change Non-price determinants of supply TINPEA - (T)axes and subsidies, (I)input Prices [i.e. cost of production] (N)umber of sellers in the market (P)rices of other goods the firms could produce (E)xpectations of producers regarding future price movements (A)vailable Technology A change in non-price factors is a change in supply A rightward shift in the supply curve indicates supply increasing An increase in supply shifts the whole supply curve to the right A decrease in supply shifts then whole supply curve to the left Price system when the forces of supply and demand create market equilibrium Market Equilibrium is the point of balance between supply and demand in the market A Market Equilibrium is a market condition that occurs at any price for which the quantity demanded and the quantity supplied are equal. Surplus happens when the quantity supplied exceeds the quantity demanded Shortage happens when the quantity demanded exceeds the quantity supplied