2.1 + 2.2 + 2.3 - Supply and Demand and Markets Flashcards
What is “effective demand”?
Effective demand is the quantity of a product that consumers want and are able to buy at a given price, at a particular time.
What is “supply”?
Supply is the quantity of a product that suppliers are willing and able to supply to a market at a given price, at a particular time.
What do supply and demand diagrams show?
They plot the quantity (Q) of a product in supply or demand against a range of different prices (P) of the product, using two curves: one for demand and one for supply.
Why does the demand curve slope downwards?
Because as the price of a product increases, the demand decreases. At higher prices, fewer buyers will be able or willing to buy the product.
Why does the supply curve slope upwards?
Because the higher the price charged for a product, the higher the quantity supplied.
How do higher profits influence producers and sellers?
Higher profits incentivize producers and sellers to maximize their production and expand output, leading to an increase in supply.
What happens when prices increase for firms with low production costs?
Firms with low production costs can produce more if the price increases by more than their costs.
What is equilibrium price?
It is the price at which the quantity demanded matches the quantity supplied, where the demand and supply curves meet.
What happens when the price of a product increases above equilibrium?
A surplus occurs because the quantity supplied exceeds the quantity demanded.
What happens when the price of a product decreases below equilibrium?
A shortage occurs because the quantity demanded exceeds the quantity supplied.
What is the relationship between price and quantity on a supply curve?
As price increases, the quantity supplied typically increases.
How is a surplus shown on a supply and demand diagram?
A surplus is shown as the horizontal distance between the quantity supplied and the quantity demanded above the equilibrium price.
How is a shortage shown on a supply and demand diagram?
A shortage is shown as the horizontal distance between the quantity demanded and the quantity supplied below the equilibrium price.
Draw a supply and demand diagram.
Draw a supply and demand diagram, when price increases
Draw a supply and demand diagram, when price decreases
What factors can cause a shift in the demand curve?
Substitutes, complementary products, consumer income, fashion and consumer preferences, advertising and branding, demographics, seasonal changes, and external shocks.
How do substitutes influence demand?
If the price of a substitute product increases, the demand for the related product will rise. For example, if margarine prices rise, butter demand might increase.
What are complementary products, and how do they affect demand?
Complementary products are used together (e.g., printers and ink). If the price of one increases, demand for the other might fall.
How does consumer income affect demand?
Higher income can lead to increased demand for expensive products, while lower income increases demand for cheaper goods and services.
How do fashion and consumer preferences influence demand?
Trends or health warnings can shift demand. For example, warnings about sugary drinks can reduce demand for them and increase demand for healthier alternatives.
How do advertising and branding affect demand?
Effective advertising increases demand by persuading customers to be loyal to a product and by attracting new buyers.
How do demographics influence demand?
Changes in population characteristics, like an aging population, can lead to increased demand for products and services tailored to specific groups.
What seasonal changes affect demand?
Demand for certain goods fluctuates with seasons. For example, winter increases demand for heating, while summer boosts demand for ice cream.
What are external shocks, and how do they affect demand?
External shocks, like threats of war, diseases, or extreme weather, can shift demand. For example, flooding increases demand for sandbags.
What factors can cause a shift in the supply curve?
Costs of production, indirect taxes, subsidies, new technology, lower costs, weather conditions, and external shocks.
How do production costs affect supply?
Higher production costs reduce supply as firms are less able to produce profitably at the same price.
How do indirect taxes influence supply?
Higher indirect taxes increase production costs, reducing supply unless firms can raise prices.
What role do subsidies play in supply?
Subsidies encourage businesses to produce more by lowering their costs, increasing supply.
How does new technology impact supply?
New technology can increase supply by improving production efficiency and reducing costs.
How do weather conditions affect supply?
Poor weather can reduce supply for agricultural goods, while good weather can increase it.
What are external shocks that affect supply?
Events like wars, trade restrictions, or natural disasters can reduce supply by disrupting production.
What causes a demand or supply curve to shift?
Changes in the market, such as consumer preferences, costs of production, or external factors, can shift the demand or supply curves to the left or right.
What happens to the demand curve when demand increases?
The demand curve shifts to the right. At the original price, there’s a shortage, so the price rises to clear the market of excess demand. A new equilibrium is reached at a higher price and quantity.
What happens to the demand curve when demand decreases?
The demand curve shifts to the left. At the original price, there’s a surplus, so the price falls to clear the market of excess supply. A new equilibrium is reached at a lower price and quantity.
What happens to the supply curve when supply increases?
The supply curve shifts to the right. At the original price, there’s a surplus, so the price falls to clear the market of excess supply. A new equilibrium is reached at a lower price and higher quantity.
What happens to the supply curve when supply decreases?
The supply curve shifts to the left. At the original price, there’s a shortage, so the price rises to clear the market of excess demand. A new equilibrium is reached at a higher price and lower quantity.
What is the relationship between shifts in supply and demand curves and equilibrium?
Any shift in the supply or demand curve will change the equilibrium price and quantity.
What is a key diagram rule to remember for supply and demand shifts?
A price change causes a movement along the curves, but shifts in the curves are caused by non-price factors.
How does an increase in demand affect equilibrium price and quantity?
Both the equilibrium price and quantity increase.
How does an increase in supply affect equilibrium price and quantity?
The equilibrium price decreases, while the equilibrium quantity increases.
