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Section 2 - Competitive markets - Coggle Diagram
Section 2 - Competitive markets
Equilibrium price
High price
Incentive to firms to supply more goods, as they can make more profit, so quantity supplied increases
Discentive to consumers who purchase less goods so quantity demanded decreases
Excess supply
Low price
Discentive to firms to supply more goods, as they would make less profit, quantity supplied decreases
Incentive to consumers to purchase more goods so quantity demanded increases
Excess demand
Conumser/ Producer surplus
Conumser surplus
Difference between total amount consumers are willing and able to pay and the total amount actually paid
Welfare consumers gain from consumer a good or servie
Producer surplus
Difference between price received by firms for a good/ service and price they would have been prepared to supply
Price mechanism
Signal
Prices convey information about economic agents (consumers and producers) which help them make decisions
Prices changes shows where resources are needed in the market
High price signals firms to enter the market but encourages consumers to reduce demand and leave the market
Rationing device
If the price goes up, the market is essentially saying this product is more scarce than it was, and we can decide if we really need it
Discincentive to some consumers to purchase, which rations the good/ service
Incentive
Encourages a change in behaviour of a consumer/ producer
High price envourages firms to supply more as its more profitable
Determines the market price
Resources are allocated throung the price mechanism in a free market
Market equilibrium
A market is in equilibrium when supply equals demand
All products that are presented for sale are sold and the market is cleared
Excess supply
Quantity supplied to a market is greater than the quantity demanded
Causes the price to be forced down
Supply would contract and demand would extend until equilibrium was reached
Excess demand
Demand for a good/ service is greater than its supply
Causes price to increase
Demand would decreases and supply would extend until equilibrium was reached
Changes in Market equilibrium
Demand curve
If the demand curve shifts, and supply curve doesn't, it'll affect supply and price
If demand increases, then price will suddenly increases, and supply will extend
If demand decreases, price will wall and supply will contract
Supply curve
If supply increases, price will fall, and demand will extend
If supply decreases, price will rise and demand will contract
Occur when there are changes in factors that affect consumer's willingness and ability to purchase goods and services
Markets
Income and substitution effect
Income effect
Fall in price increases consumer purchasing power
More people can buy more with the same budget
Substitution effect
Fall in the price of good X makes it cheaper as compared with substitutes
Some consumers will switch to good X leading to a higher demand
Set of institutions that govern when consumers and producers meet to exchanges goods/ services
Derived demand
Demand for one good is linked to the demand for a related good
Demand for labour is derived from the demand for the building of new homes
Composite demand
Good demanded has more than one use
Joint demand
Goods are bought together
Increase in one is likely to lead to an increase in the other
Joint supply
Increasing the supply of one good increases the supply of another