Markets

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    Markets

    These are some key words and definitions which must be learnt as in the exams you must define the terms that you use to demonstrate you true understanding.

    Scarcity: the condition of having unlimited wants/desires and limited resources (or distribution /dissemination of them)

    Market: a place where buyers and sellers meet and agree on a price of goods or services.

    Opportunity cost: the cost of any activity measured in terms of the value of the next best alternative foregone

    Demand

    Demand: the willingness and ability of the consumer to consume a good or service in a given amount of time.

    The law of demand: as the price of a product falls, the quantity demanded of the product will usually increase, ceteris paribus.

    The market demand gives the total quantity demanded by all consumers. The individual demand is the demand of one individual or firm.

    The demand curve represents the relationship between the price and the quantity demanded of a product.

    The change in the price of a good causes a movement along the demand curve. For instance, as price falls from P to P1 the demand moves down the demand curve, which increase the quantity demanded from Q to Q1.

    The non-price determinants of demand

    A change in the non-price determinants shift the demand curve because the quantity demanded at the price has changed.

    Substitutes: Goods that can be used in place of one another as they satisfy the same needs

    If the price of a substitute rises, demand for the good will increase

    If the price of coffee falls, many people will shift from drinking tea to drinking coffee and the demand curve for tea shifts in to the left

    Complements: Goods which tend to be used jointly

    If the price of a complement rises, demand will decrease.

    If the price of petrol rises people are motivated to use their car less, and the demand for cars shifts to the left.

    Population: if the population grows/changes composition (old/young) there are more consumers and demand will shift out to the right

    Tastes and preferences: more people may want the product or service (a product becomes ‘fashionable’) and demand shifts out

    Real income: when income rises, more people can afford to buy cars and the demand curve for cars shifts to the right for normal goods and a decrease in demand for inferior goods. (Don’t worry too much about this definition, it will become clearer once you have studied income elasticity, just remember real income affects demand)

    Advertising: the more effective the advertising the greater the demand, unless the government uses negative advertising for things such as the dangers to health from cigarette smoking

    So just remember SCRIPTA for this (substitutes, complements, real income, population,  tastes, advertising)