The price mechanism

Created by

Lucas B

Cards (12)

How can the price mechanism be used as a rationing device?
Market forces will ensure that the quantity demanded is equal to the quantity supplied
How can the price mechanism be used as an incentive?
The prospect of making a profit acts as an incentive to firms willing to produce goods and services
How can the price mechanism be used as a signalling device?
It tells producers to increase or decrease the amount supplied
How can the price mechanism be used to determine changes in wants?
A change in demand will be reflected by a change in price
What is consumer surplus?
The difference between how much consumers are willing to pay and how much they actually pay for a product
How can consumer surplus be represented on a graph?
It is the area above the market price
What is producer surplus?
The difference between the profit the producer receives and the cost of supply
How can producer surplus be represented on a graph?
It is the area below the market price
How does the gradient of the demand curve affect the consumer surplus?
The steeper it is, the greater the consumer's surplus will be
How do changes in the conditions of demand affect the consumer surplus?
An increase in demand will increase the amount of consumer's surplus, and vice versa
How does the gradient of the supply curve affect the producer surplus?
The steeper it is, the greater the producer's surplus will be
How do changes in the conditions of supply affect the producer surplus?
An increase in supply will increase the amount of producer's surplus