2.1 Demand, Supply and Equilibrium Flashcards
Demand
the willingness and the ability to purchase a particular good at a given price and time, ceteris paribus
Movements along the demand curve
a change in price will lead to a change in the quantity demanded which will lead to a movement along the demand curve.
the Law of demand
States that as price increases, the quantity demanded will decrease. and vice versa
ceteris paribus
Shifts in the Demand Curve (non-price determinants)
Tastes and preferences
Income
Related foods (substitutes and complements)
Expectations
Size of the market
Horizontal summing
the values on the x axis are added together, and the values on the y axis do not change
Market demand refers to the sum of all individual demand for a particular product at each price level.
Assumptions of the law of demand
3 causes of negative relationship between price and quantity demanded
income effect
substitution effect
law of diminishing marginal utility effect
Income effect (HL)
when the price of a product falls, then people will have an increase in their ‘real income’.
people will be likely to buy more of the product with the income they have
Substitution effect (HL)
when the price of a product falls, then the product will be relatively more attractive to people than other products, whose prices have stayed unchanged, and so it is likely that consumers will purchase more of the product, substituting it for products that were previously purchased.
Essentially: the substitution effect causes consumers to replace higher priced products with lower prices ones.
Law of diminishing marginal utility (HL)
As consumption increases, the marginal utility derived from each additional unit declines.
Supply
the willingness and ability to produce a particular good at a given price and time, ceteris paribus.
The Law of supply
as the price increases, the quantity supplied will also increase, vice versa
curve is upwards sloping
Shifts in the supply curve (non-price determinants)
Technology
input costs
government intervention (taxes, subsidies)
expectations
related goods (supplier substitutes)
supplier numbers
Indirect tax
A tax on goods and services, also known as expenditure tax
Subsidy
A payment by the government to a producer per unit of output to increase the supply of a good or lower production costs.
Assumptions underlying the law of supply (HL)
The law of diminishing marginal returns
increasing marginal costs
The law of diminishing marginal returns (HL)
After a certain optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output.
= related to the concept of diminishing marginal utility
Increasing marginal costs (HL)
marginal cost is the increase in cost caused by producing one more unit of the good.
Equilibrium
is where there is no tendency to change.
is where the supply and demand intersect
equilibrium surplus
when the price is higher than the equilibrium
excess supply
QS>QD
equilibrium shortage
when the price falls below the equilibrium
excess demand
QD>QS
Explaining an Equilibrium Diagram
- Interpret the question and state assumptions and which determinant is occuring.
- curve shift
- effect on price and quantity
- effect on the other curve
Allocative Efficiency
resources are allocated into their best possible use (the most efficient way from society’s pov)
consumer surplus is maximized
Marginal social cost (MSC) = supply curve
Marginal social benefit (MSB) = demand curve
MSB = MSC is allocative efficiency