1.1 Demand and Supply & Equilibrium Flashcards
Market
a physical or virtual place where people come together and exchange goods or services for currency.
Some types: product markets (goods and services), factor markets (factors of productions)(eg. labour market etc) and financial markets (stocks, currency etc.)
At core of market theory: concept of demand and supply.
Demand
The quantity of a good or service that consumers are willing and able to purchase at a given price in a given time period.
The Law of Demand
states: As the price of a product falls, the quantity demanded of the product will usually increase, “cetereis paribus”
aka:
“The demand curve normally slopes downwards”
ceteris paribus
an assumption of “all other things being equal”. When there are a number of different factors that determine something, only one is changing and all of the others are held constant.
Eg. in the Law of Demand price is changing but any other determinants of demand are assumed to be unchanging.
The non-price determinants of demand.
if its’ no price, then it’s a shift in the curve.
- Income:
(concepts: normal goods & inferior goods) - The price of other products.
(concepts: Substitutes & complements) - Tastes/Preferences
Other factors:
- size of population
- changes in age structure in population
- changes in income distribution
- government policy (eg. taxes)
- seasonal changes
Veblen good
some products become more popular as their prices rise due to conspicuous consumption; he fact that people gain satisfaction from being seen to consume expensive products by others
The Law of Supply
states: as the price of a products rises, the quantity supplied of the product will usually increase, ceteris paribus. or aka: the supply curve normally slopes upwards.
Supply
Supply is the willingness and ability of producers to produce quantity of a good or service at a given price in a given time period.
The non-price determinants of supply
1 .The cost factors of production
- The price of other products, which the producer could product instead.
- The state of technology
- Expectations (eg. with holding)
- Government interventions (eg. taxes)
Movement along a supply curve vs a shift of the supply curve.
price change: movement along
other determinants: shift
Equilibrium
“a state of rest, self-perpetuating in the absence of any outside disturbance”
Where demand meets supply.
The invisible hand
Adam Smith metaphor of the demand and supply’s force
Excess supply
When Qs is higher than Qd at a given price. More is supplied than demanded for given price.
Price will fall until there equilibrium.
Excess demand
When Qd is higher Qs at a given price. More is demanded than supplied for the given price.
Price will have to increase until there’s equilibrium Qd and Qs.
Consumer surplus
The extra satisfaction (or utility) that is gained by consumers from paying a lower price than that which they were prepared to pay.