1.2: Demand and Supply, Equilibrium, Price Mechanism, CS and PS Flashcards
Demand
Refers to the quantity of good/service that a consumer is willing and able to purchase at each price.
Law of Demand
As price increases, quantity demanded decreases. Vice versa, as Price decreases, QD increases. Have an inverse relationship
Expansion
Increase in QD, QS
Contraction
Decrease in QD, QS
Change in Demand
Shift of demand curve either inwards or outwards caused by the determinants of demand. Not price related
Subsitutes
Goods that can be used in place of one another or have “competing demand”
Complements
Goods that have to be consumed together or are in “joint demand”
Supply
Refers to the quantity of good and services a firm is willing and able to supply at each price for a given period of time.
Law of Supply
When price increases, so does quantity supplied as firms are able to earn more revenue for each product sold. However as price falls, quantity supplied goes down as there is less revenue for each product sold. Have a direct relationship
Total Revenue
Price times Quantity
Determinants of Supply
Shifts in supply curve inwards or outwards caused by the determinants of supply. Not price related
Movement along the curve
Changes in QD or QS that are solely due to price changes. (Not Determinants)
Equilibrium Price and Quantity
Is the market clearing price where the QD equals to the QS. (Intersection between demand and supply curve).
Surplus
Is when quantity supplied is higher than quantity demanded. Surplus of good and services
Shortage
Is when quantity demanded is higher than quantity supplied. Shortage of goods and services
Price Mechanism
Refers to the interactions of market demand and supply in order to allocate scarce resources.
Rationing
The fall in the supply of a goods/service would lead to a price increase. This is due to the existence of excess demand or shortage of goods and services. Eventually it will be rationed to individuals who are willing and able to pay for higher prices.
Signalling
An increase in the price of a good or service tells the firm it should increase the production of that good to earn more revenue each product. Resources are mobilised into its production away from goods that are less profitable.
Transmission/Incentive
Increase in the price of a good/service indicates that consumers are favouring it. Price falls indicate that the product has fallen out of popularity with the consumers.
Consumer Surplus
Difference between the highest price a consumer is willing and able to pay compared to the actual price paid.
Extra: Above equilibrium price and narrows as more units are being consumed
Producer Surplus
The difference between the market price and the lowest price that a firm is willing and able to supply at
