agricultural economics (part 1)

what is economics?

a study of how society decides what to produce, how and for who

what does price act as?

an automatic signal to trigger an exchange of goods

what does price mechanism co-ordinate?

the allocation of resources

what are the 3 main assumptions of the basic market model?

1. prices,

2. markets,

3. all benefits and costs of the decisions of buyers and sellers are internal,

what decisions of 2 groups are prices determined by?

consumers - who determine the demand for a good/service,

producers - who determine the supply of a good/service,

what does it mean having competitive markets?

no individual buyer or seller can influence the market price

what does monopolistic mean?

having or trying to have complete control of something, especially an area of business, so that others have no share

what does price elasticity measure?

the responsiveness of the quantity demanded or supplied of a good determined by a change in price

what do elastic demand or supply curved indicate?

how the quantity responds to price changes

how is price elasticity calculated?

% change in quantity demanded/supplied divided by % change in price

what is the demand curve?

the hypothesised relationship between the quantity demanded of a good or service and its market price

what is the relationship presumed to be on a demand curve?

downward, sloping from left to right (a negative curve)

as the price of goods increase, what 2 effects can this have?

• income effect - consumers less able to buy,

• substitution effect - consumers less willing to buy as substitutes are relatively cheaper

what is the price elasticity of demand?

a measure of how much the quantity demanded responds to a change in price

what is inelastic demand?

a large change in price creates a small change in demand

when does inelastic demand occur?

when product substitution is less likely

what is changes in price like during elastic demand?

larger change in price creates larger change in demand

when does elastic demand occur?

when product substitution is more likely

what factors affect supply and demand?

• number of buyers in the market,

• consumer income,

• consumer tastes and preferences,

• price of related goods (e.g. substitutes)

• consumer expectations or forecasts for the future,

what does a supply curve show?

a hypothesised relationship between the quantity supplied of a good or service and its market price

what could happen when price rises? (why)

some suppliers will be more likely to supply the good as a higher price means a higher profit margin as long as production costs are unchanged

what are some suppliers more able to do when price rises? (why)

supply the good at a profit as they can more easily cover their production costs

what is inelastic supply?

larger change in price creates small change in supply

when does inelastic supply occur?

with long term seasonal production

what is elastic supply?

larger change in price creates large change in supply

how can organisations respond to changes in price?

quickly

what can similar changes in price cause?

differing effects on quantity

what does the market model show?

how market forces work to achieve the allocation of resources between different alternative choices

what does the market model determine?

how much of a particular good or service will be produced in an economy, how it will be produced, and who will get to consume it

what does market equilibrium usually achieve?

the most efficient allocation of resources

what can changes in demand be caused by?

• disposable income,

• price of substitute goods,

• price of complementary goods,

• tastes/fashions/trends,

• expectations about future prices,

• other factors

what can shifts in the supply curve be caused by?

• weather patterns,

• production costs,

• taxes and subsidies,

• expectations of future prices,

• random shocks and unpredictable events,

• profitability of alternative production decisions,