Economic: The Market Economy

Chapter 4

Rationing function

when there is a shortage, price is bid up

The law of demand

states that as prices rise the quantity demand will fall (vice versa), with all other things being equal

Complementary goods

are goods which are consumed together or are used in conjunction with one another. a rise in the price of one good will lead to a decrease in the demand for another good.

Effective demand

refers to the willingness and ability of consumers to purchase goods at different prices. Effective demand is demand supported by the necessary purchasing power of consumer.

Derived demand

is when a factor of production isn’t demanded for its own sake but rather for its contribution to the production process.

Normal goods

are goods that demand increase for them when people’s incomes increase

Inferior goods

are goods that demand decreases for them when people’s incomes go up.

Market demand

is the total quantity of a good that all consumers demand at different prices

What are the factors that cause shifts of the demand curve?

• Income levels: Income rises then demand for normal goods will increase

• Substitute goods: the price of an alternative good increased then demand for the original good will increase

• Complementary goods: the price of a complementary good decreased then the demand for the original good will increase

• Tastes & preferences: the consumers tastes and preferences change this will impact demand. The stronger a consumer taste or preference the higher the demand will be for that good.

  Unplanned events: Factors such as the weather may influence the demand for a good. E.g. Covid

What are the exceptions of the law of demand?

• Snob Items: a rise in price makes these goods more exclusive, and therefore more attractive to those who have the incomes to purchase them.

• Speculative Goods: prospective consumers think that prices are likely to be even higher in the future, the current level of demand may not fall even if prices increase.

• Goods of Addiction: consumers become so addicted to the drug that in order to get the same ‘buzz’ from consumption of the drug.

The law of supply

states that as prices rise the quantity supplied will rise (vice versa)ceteris paribus (all other things being equal),

Shift in the supply curve

is caused if any of the other factors other than the price of the good itself change