2.3 + 2.4 - Demand + Supply Flashcards
Demand
Demand is the amount of a good/service that a consumer is willing & able to purchase at a given price in a given time period
Ineffective demand
If a consumer is willing to purchase a good, but cannot afford to
Individual demand
The demand of a good/service by an individual consumer
Market demand
The combination of all the individual demand for a good/service
- calculated by adding up the individual demand at each price level
The income effect
The change in consumption resulting from a change in real income
Demand curve features
Slope right to left (upwards)
- price: y axis
- quantity: x axis
Movements along the a demand curve
A change in quantity demanded as a result of changes in the price of the good only
Extension of demand
When quantity demanded for a good increases because its price falls; it is shown by a movement down the demand curve to the right
Contraction of demand
When quantity demanded for a good falls because its price rises; it is shown by a movement up the demand curve to the left
An increase in demand
A rise in demand at any given price, causing the demand curve to shift to the right (up)
A decrease in demand
A fall in demand at any given price, causes the demand curve to shift to the left (down)
Ceteris Paribus
A Latin phrase that means “all other things held constant”
What is the inverse relationship between the QD and price?
- When the price rises the QD falls
- When prices fall the QD rises
The 6 conditions of demand
- Advertising/branding
- Changes in real/disposable income
- Changes in taste/fashion
- Changes in the price of substitute goods
- Changes in the price of complement goods
- Changes in the population size/distribution
How does advertising affect demand?
- The more the product is advertised, the more consumers are aware of it and will demand it more
- There is a direct relationship between branding/advertising & demand
- Advertising increases: demand increase (shifts to the right)
- Advertising decreases: demand decreases (shifts to the left)
How does change to the levels of real income affect demand?
- Determines how many goods/services can be enjoyed by consumers
- There is a direct relationship between income & demand for goods/services
- Real income increases: demand increases (shifts right)
- Real income decreases: demand decreases (shifts left)
How do tastes and fashion affect demand?
- If goods/services become more fashionable, demand will increase for them (same vice versa)
- There is a direct relationship between consumer tastes and demand for goods/services
- Product becomes more fashionable: demand increases (shifts right)
- Product becomes less fashionable: demand decreases (shifts left)
How does the size and distribution of population affect demand?
- When the population size of a country changes over time, so will the demand for products
- There is a direct relationship between population size and demand for goods/services
- Demand will also change if there is a change to the age distribution in a country
- different ages demand different goods/services e.g an ageing population will buy more hearing aids - Population increase: demand increases (shifts right)
- Population decrease: demand decreases (shifts left)
How does a change in the price of substitutes affect demand?
- Consumers will buy the product which costs less as they provide the same purpose
- There is a direct relationship between the price of substitutes and demand
- Price of substitute increases: demand increases for other product (shifts right)
- Price for substitute decreases: demand decreases for other product (shifts left)
How does a change in the price of complements affect demand?
- Complementary goods are bought to be used alongside the original product
- There is an inverse relationship between the price of complementary products and demand
- Price of complementary good increases: demand decreases for other product (shifts right)
- Price of complementary good decreases: demand increases for other product (shifts left)
- people will buy more of complementary product and so will want more of the other
Supply
Supply is the amount of a good/service that a producer is willing & able to supply at a given price in a given time period
Individual supply
The supply of a good or service by an individual producer
Market supply
The combination of all the individual supply for a good/service
- calculated by adding up the individual supply at each price level
Supply curve
slope left to right (upwards)
- y-axis: price
- x-axis: quantity
What happens to supply as price rises?
The quantity supplied by producers extends because production becomes more profitable
What happens to supply as price falls?
The quantity supplied by producers contracts because production becomes less profitable
Movements along the supply curve
If price is the only factor that changes (ceteris paribus), there will be a change in the quantity supplied (QS)
Extension of supply
A movement along the supply curve to the right (higher price & higher quantity supplied) - upwards
Contraction of supply
Movement along the supply curve to the left (lower price & lower quantity supplied) - downwards
An increase in supply
A rise in supply at any given price, causing the supply curve to shift to the right (downwards)
A decrease in supply
A fall in supply at any given price, causing the supply curve to shift to the left (upwards)
What 6 conditions effect quantity supplied?
- Cost of production / factors of production
- Indirect tax
- Subsidies
- New technology
- Change in the number of firms in the industry
- Weather events
How does cost of production affect supply?
- If the price of raw materials or other costs of production change, firms respond by changing supply
- There is an inverse reaction
- Increase COP: decreased supply (shifts left)
- Decrease COP: increased supply (shifts right)
How does the indirect tax of a country affect supply?
- Any changes to indirect taxes change the cost of production for a firm & impact supply
- Increased tax: decreased supply (shifts left)
- Decreased tax: increased supply (shifts right)
Indirect tax
A tax levied on one party (producers) but passed on to another for payment (consumers)
How do subsidies affect supply?
- Changes to producer subsidies directly impact the cost of production for the firm
- Subsidy increases: supply increases (shifts right)
- Subsidy decreases: supply decrease (shifts left)
Subsidy
An amount of money paid by the government to a firm, per unit of output
How does new technology generally affect supply?
- New technology increases productivity and lowers costs of production
- ageing technology can have the opposite effect
- Technology increases: increased supply (shifts right)
- Technology decreases: decreased supply (shifts left)
How does the number of firms in an industry affect supply?
- The entry and exit of firms into the market has a direct impact on the supply
- e.g. if ten new firms start selling building materials in Hanoi, the supply of building material will increase
- No. of firms increases: supply increases (shifts right)
- No. of firms decreases: supply decreases (shifts left)
How do weather events affect supply?
- Droughts or flooding can cause a supply shock in agricultural markets
- a drought will cause supply to decrease
- unexpectedly good growing conditions can cause supply to increase
- Drought: supply decreases (shifts left)
- Good weather: supply increases (shifts right)
