Chap5 - The interaction of markets

• What does "Ceteris Paribus" mean?

  Providing all other conditions remain the same
• How does an increase in VAT affect disposable incomes, ceteris paribus?

  It will mean disposable incomes are lower
• What is the equilibrium price and quantity?

  It is when supply meets demand
• What is the market clearing price?

  It is the price at market equilibrium where price has no tendency to change
• How is disequilibrium characterized?


  By excess demand or excess supply
• What happens at the new quantity which is lower than what it was at equilibrium when price is lower than what it was at equilibrium?

  Demand is greater than supply, resulting in a shortage
• What happens when there is excess demand?

  Prices go up and firms supply more
• What occurs when supply is above equilibrium price?

  There is excess supply
• What happens when there is a surplus of a greater quantity - equilibrium quantity?

  Price will fall back to P1 as firms lower their prices and try to sell their goods. The market will return back to equilibrium.
• What causes new market equilibriums to be established?

  Shifts in demand or supply curves due to PIRATES or PINTSWC reasons
• What happens if there is an increase in the size of the population?

  Demand shifts to the right, increasing price to P2 which is higher than equilibrium price.
• How do commodity prices behave in the short run?

  They are usually unstable
• What factors contribute to unstable food prices?

  Better technology, new market entrants, and supermarket buying power
• How do weather patterns affect commodity prices?

  Changes in supply due to weather can affect prices
• What does a cobweb diagram illustrate?

  It shows the relationship between supply and price over time
• What happens when farmers plan output based on previous prices?

  They may end up producing less than expected, pushing prices up
• What is a consequence of information failure in farming?

  Producers may leave the market due to poor planning
• How can an increase in supply create a 'cobweb' effect?

  It can lead to fluctuating prices and quantities over time
• How do changes in one market affect related markets?

  A change in demand or supply in one market can cause changes in related markets
• What happens to the price of chocolate if the supply of cocoa beans decreases?

  The price of chocolate may increase
• How does an increase in margarine prices affect the butter market?

  It may cause a shift outward in demand for butter
• Why is demand for agricultural produce stable in the long run?

  Because the largest markets tend to have stable populations
• Why is food demand considered price inelastic?

  Because it is a necessity and not very responsive to price changes
• What factors contribute to unstable supply in agriculture?

  Poor technology, geographical distance, and supply-side shocks
• How do house prices affect consumer wealth in the UK?

  Changes in house prices can significantly affect consumer wealth
• What is the wealth effect in relation to house prices?

  It leads to an increase in consumer spending when house prices rise
• How does demand for transport vary?

  It varies with times, such as off-peak and peak periods
• What factors affect the demand and supply of transport?

  Prices of petrol, train tickets, substitutes, and journey time
• What are the assumptions underlying the model of supply and demand?

  They assume certain markets, price behavior, and perfect information
• What are the limitations of the supply and demand model?

  Consumers and producers do not always have perfect information
• In what type of markets is the supply and demand model most useful?

  In competitive markets with many buyers and sellers