The Market System

PART 1 Demand and Supply

Demand The amount of a good that will be bought at given
prices over a period of time.
Exporters Firms that sell overseas.
Market A set of arrangements allowing buyers and sellers to
communicate and exchange goods and services.
Market system or price mechanism The automatic
determination of prices and the allocation of resources by the
operation of markets in the economy.
Price The amount of money that goods are exchanged for in
a transaction.
Supply The amount of a good that sellers are prepared to
sell at given prices over a period of time.

Profit The extra money you make when selling a product

(price you bought-price you sold=profit)

Demand curve a line drawn on a graph which shows how

much of a good will be bought at different prices.

Effective demand What consumers are willing AND able to

pay, not how much people would like to buy if they had an
endless supply of money

Inverse relationship (between price and quantity demand)

when price goes up the quantity demand falls and when the
price goes down the quantity demanded rises.

Supply curve A line drawn on a graph which shows how

much of a good sellers are willing to supply at different prices

Complementary goods goods purchased together because

they are consumed together.

Inferior good a good for which demand will fall if income rises
or rise when income falls

Normal good a good for which demand will rise if income

rises or fall if income falls

Shift in the demand curve a movement to the left or right of

a demand curve when there is a change in any factor affecting
demand except the price.

Substitute goods goods bought as an alternative to another

but perform the same function.

Indirect taxes taxes imposed by the government on

spending.

Advalorem tax a tax levied as a percentage of the price of a

good

Specific tax a lump sum tax on the amount sold, per unit for
example.

Subsidy a grant given to producers, usually to encourage

production of a certain good.

Equilibrium price a price where supply and demand are

equal

Excess demand where demand is greater than supply and

there are shortages in the market.

Excess supply where supply is greater than demand and

there are unsold goods in the market

Market clearing price price where the amount supplied in a

market matches exactly the amount demanded.

Total revenue the amount of money generated from the sale

of goods calculated by price x quantity.

Elastic demand a change in price results in a greater change

in demand.

Inelastic demand a change in price results in a

proportionately smaller change in demand.

Price elasticity of demand the responsiveness of demand to

a change in price

Price elasticity (Percentage change in quantity

demanded / Percentage change in price)

Price elasticity of supply the responsiveness of supply to a

change in price

Income elasticity of demand the responsiveness of demand

to a change in income.

Discretionary expenditure non-essential spending or

spending that is not automatic.

Unitary elasticity Where price elasticity of demand for a

product is equal to 1. For such a product total revenue is
exactly the same at all prices.

PART 2 The role of the market in solving the economic

problem

Basic economic problem allocation of a nations scarce

resources between competing between uses that represent
infinite wants

Finite resources there is a limited amount of these recources

Choice deciding between alternative uses of scarce

resources.

Needs basic requirements for human survival.

Opportunity cost when choosing between different

alternatives it is the benefit lost from the next best
alternative.

Production Possibility Curve (PPC) a line which shows the

different combinations of two goods an economy can produce
if all resources are used up.

Scarce resources the amount of resources available is

limited.

Wants peoples desires for goods and services.

Economy system that attempts to solve the basic economic

problem

Efficiency- minimizing costs and the use of resources

Market Failure- where markets lead to inefficiency

Merit goods- goods which are under-provided by the private

sector, so they are provided by the government

Demerit goods- goods where society is worse when we

consume them

Mixed economy- an economy where goods and services are

provided by both the private and public sectors.

Private sector- the provision of goods and services by

businesses that are owned by individuals or groups of
individuals (clothing retail, restaurant etc)

Public goods- goods that are not likely to be provided by the

private sector

Public sector- government organisations that provide goods

and services for the economy (public transport, police etc)

PART 3 The labour market : an example of a market in

a mixed economy

Negative Externalities the damages caused to a third party

due to the spill over effects of one of the above.

Lack of competition firms become too large and dominate

the market place

Lack of information buyers and sellers to do not have

adequate information to make informed decisions

Factor Immobility factors of production can not be move

freely from one place to another

Division of Labor the breaking down of the production

process into small parts with each worker allocated to a
specific task

Specialization the production of a limited range of goods by

individuals, firms, regions or countries.

Working population those people who are in work or seeking

work.

Derived demand- demand that arises because there is

demand for another good

Wage rate- the amount of money paid to workers for their

services over a period of time (i.e the price of labor)

Productivity- A measure of output per person per time period

Total Output
Productivity = ------------------- Quantity of Factor
Minimum wage a minimum amount per hour which most
workers are entitled to be paid