1.3 Demand and supply in Product markets Flashcards
how are prices determined in competitive markets?
by market forces of supply and demand
what does a supply and demand curve diagram examine?
the relationship between prices and quantities
definition of demand
the quantity of a good or service that consumers are willing and able to purchase at any given price
what is the law of demand?
- there is an inverse relationship between price and quantity
- as price falls, quantity demanded increases (vice versa)
word for making an assumption
ceteris paribus
the demand curve is
downwards sloping
income effect definition
as price falls people’s income goes further and their purchasing power increases
substitution effect definition
as the price of a good decreases, ceteris paribus, it becomes cheaper relative to its substitutes
diminishing marginal utility definition (on an individual scale)
consumers gain less (diminishing) utility from each additional (marginal) unit that is consumer
what is the monetary value of utility?
the maximum price willing to be paid
reasons for the demand curve being downwards sloping
- income effect
- the substitution effect
- diminishing marginal utility
difference between a movement along and a shift in the demand curve
movement along: caused by a change in price
shift: caused by a non-price determinant
the similarity between a movement along and a shift in the demand curve
both result in a change in demand
other causes of movements along the demand curve (other than price change)
- changes in supply
- government intervention (i.e. price floors and ceilings)
extension in demand definition
a fall in price leading to a movement outwards in quantity terms of demand
contraction in demand definition
an increase in price leading to a movement inward in quantity terms of demand
increase in demand definition
a shift outwards of the demand curve that represents an increase in the quantity demanded AT ANY GIVEN PRICE
decrease in demand definition
a shift inwards of the demand curve that represents a decrease in the quantity demanded AT ANY GIVEN PRICE
non-price determinants of demand
- change in the price of a substitute good
- change in the price of a complementary good
- derived demand
- changes in tastes & advertising
- changes in incomes (for normal & inferior goods)
- changes in population/demographics
- changes in legislation
what is derived demand
demand that derives from the demand for another good and which usually applies to markets of factors of production (e.g. demand for phones goes up –> the demand for silicone goes up)
examples of legislation that affects demand
- ban on smoking in public places
- mask regulations
supply definition
the quantity of a good or service that producers are willing and able to sell at any given price
law of supply
- direct relationship between price and quantity supplied
- as price increases, the quantity supplied increases
the supply curve is…
upwards sloping
profit incentive definition
- assuming production costs are constant
-> profits will increase as price increases
–> creating an opportunity cost of staying out of the market and an incentive for more firms to join and stay in the market
covering costs of production
- costs of production differ for each firm
-> at low prices, only firms with low costs of production can profit
–> as price increases, firms with higher costs of production are also able to profit from producing
—> creates incentives for firms to produce more and enter the market
why are supply curves upwards sloping
- profit incentive
- covering costs of production
- increasing marginal costs
contraction in supply definition
a fall in price leading to a movement inward in quantity terms of supply
extension in supply definition
a rise in price leading to a movement outwards in quantity terms of supply
increase in supply definition
a shift outwards of the supply curve that represents an increase in the quantity demanded AT ANY GIVEN PRICE
decrease in supply definition
a shift inwards of the supply curve that represents a decrease in the quantity demanded AT ANY GIVEN PRICE
non-price determinants of supply
- government intervention
- the discovery of new sources of resources
- number of firms
- competitive supply
- shock/unpredictable events
- improvements in technology
- joint supply
- costs of production
- price expectations
what is competitive supply?
when goods use the same resources so that the production of one good reduces the amount of resources available for another (e.g. wheat in bread and noodles)
examples of government intervention as a non-price determinant of supply
- taxes (specific and ad valorem)
- subsidies
