Ch 2: Demand and Supply Flashcards
What is demand?
refers to the buying intentions of consumers; quantity demanded of a good/service at a particular price and time. Must be effective demand, that is the consumer is both willing and able to consume the good or service
What is the law of demand?
as the price of a good rises, people buy less of it, ceteris paribus. The only exception to this law are inferior goods and status or position goods.
What are the two causes that work together to form the law of demand?
- income effect: when the price of a good rises, consumers are not willing to buy as much of the good because their real income/buying power has decreased i.e. if you have $100 income and the price of a pizza is $10, your real income is 10 pizzas. If the price increases to $20, your real income decreases to 5 pizzas
- substitution effect: when the price of one good rises, other goods become more attractive to buyers because they are relatively cheaper
What is derived demand?
refers to the demand for product resources, which is derived from the demand for final goods and services or output
What are non-price factors affecting demand?
- level of disposable income- how big is your budget? More of a good will be purchased when income increases- unless it is a low-quality/inferior product
- price of related goods- substitutes: if the price of one increases the demand for the other increases i.e. pizza and burgers, orange juice and apple juice complements: if the price of one increases, the demand for the other decreases i.e. computers and software, cars and petrol
- taste and preferences- influenced by advertising i.e. digital cameras reducing sales of 35mm cameras
- expectations of consumers- if people expect conditions to change in the future they make decisions now rather than postpone them
- demographic factors
What is supply?
represents the sellers or producers side of the market; amount of a good/service that producers are willing and able to sell at a particular price and at a particular point in time
What is the law of supply?
as the sale price of goods or services rise/expands, quantity supplied will also rise/expand. This is because a rational, self-interested producer would prefer to sell their output at a high price rather than a low price because of the profit motive. Also when firms increase their output they may find that their production costs may also increase, which would require price to rise to maintain their profit margin.
What factors affecting supply?
- price of inputs- the price of resources determine the firm’s cost of production. An increase in production costs will mean that for a given price the firm will decrease its production (i.e. increase in price of labour or capital)
- price of other goods- the producer will closely monitor movements in the prices of the goods he/she is capable of supplying so he/she can take advantage of profit opportunities
- technology- if technology improves, more output can be produced from the same quantity of resources. This means the firms production costs will fall which equals an increase in supply
- expectations of producers- suppliers expectations of future conditions may affect the quantity supplied. If a higher price is expected in the future, firms will decrease their current production in order to take advantage of future higher prices- it’s a deliberate movement of their supply curve
What is equilibrium price and quantity?
equilibrium price and quantity will be where quantity demanded equals quantity supplied. This is the price where the demand curve intersects with the supply curve.
Give an example of how market equilibrium occurs?
if a producer produces a lot of goods at a high price, consumer demand will be less than what is being supplied. Each day, the producer will be left with surplus, the producers will notice this and reduce the price, quantity demanded will then expand and quantity supplied contract and at one point they will meet and this represents equilibirum price and quantity
