CH4:Price, Demand and Supply Flashcards
Definition: Market
A medium through which buyers and sellers of goods or services come together to trade
What are the 4 types of market?
Goods - finished goods and services
Factor - trading the factors of production ; land, labour, capital, entrepreneurship (e.g. the job market)
Commodity - raw materials
Financial- shares and loans
Definition: Demand
The extent to which consumers are willing and able to buy a good or service at any given price over a set time period
What is the impact of a change in price on the demand curve (graphically)?
Changes in price cause a movement ALONG the demand curve: an EXTENSION (ie.increase) or CONTRACTION (decrease) of demand.
Why does an inverse relationship typically arise between price and demand?
Consumers look to maximise their utility from their scarce resources (e.g. their income)
Definition: Utility
The measurement of the amount of satisfaction/enjoyment a customer gets from consuming a given good or service
What is another way to think about the relationship of price and demand (rather than inverse)?
Opportunity cost
Definition: opportunity cost
The amount the individual has to give up in order to buy the good or service
(e.g. as the price rises, consumer has to give up more vs. other goods/services they could buy i.e. less value for money)
What are the two types of demand?
1) Individual demand - demand for a specific product at one COMPANY
2) Aggregate demand - the demand for one product at any given price level in the WHOLE MARKET
Other than price, what are some factors which impact the level of demand? (ie. if the price stays the same)
Levels of income - as income rises disposable income rises, consumers spend more, hence demand increases
Market expectations - if prices are expected to rise in the future, consumers will increase their expenditure in the short term
Size of the population - an increase in population in a specific area may result in a rise in demand for many goods
Competitor prices - substitutes goods? and complimentary goods?
Factors that impact consumer preferences - eg. fashion, taste, wether the good is inferior or normal will affect consumer preferences
How do factors - other than price - impact the demand curve?
They cause a shift in the actual demand curve to the Right (an increase/rise in demand) or Left (decrease/fall in demand)
Definition: Normal goods
Good whose demand increases as income increases e.g. branded products
Definition: Inferior goods
Demand for these products tends to fall as income increases e.g. value range products
Definition:Substitute goods
Goods that satisfy the same need for the buyer as the original product. if the price of the substitute is low, demand for the original good/service may decrease.
Formula: Total consumer expenditure
Total consumer expenditure= Price x Quantity demanded
Definition: Veblen Goods
Goods where demand increases as their price increases. Becomes more exclusive so demand increases (e.g. Rolex watch)
(i.e. they have an upward sloping demand curve vs. the usual downward sloping for most common goods where demand decreases as price increases)
Definition: Veblen Goods
Goods where demand increases as their price increases. Becomes more exclusive so demand increases (e.g. Rolex watch)
(i.e. they have an upward sloping demand curve vs. the usual downward sloping for most common goods where demand decreases as price increases)
Definition: Giffen Goods
Inferior, staple goods with NO substitutes, hence even if price increases consumers have no choice but to continue buying them so demand rises (e.g. rice in certain countries) .
What are the classifications of a Giffen Good?
- Inferior good (i.e. a low cost, value product)
- has no substitutes
- its a staple good
Definition: Supply
The extent to which companies are willing and able to supply a product at any given price over a set period of time
True or false: “Supply is all about how buyers and sellers react differently to price?”
True
What is the general assumption between price and supply
If all other factors remain equal, an increase in price will cause an increase in supply and visa versa
What is the usual relationship between price and supply graphically/ illustrated by the supply curve?
Price changes cause a shift/movement ALONG the supply curve: an extension/expansion or contraction in supply
Extension of supply: increase in quantity supplied when price increases
Contraction of supply: decrease in quantity supplied when price decreases
What is the relationship between price and supply and why does it occur?
Positive relationship
reason: supplying more at a higher price yields a higher profit per unit (i.e selling price per unit - cost to make the unit)
Definition: Individual supply
Supply at an individual level e.g. an individual company’s supply schedule
Definition: Market (aggregate) supply
Supply at the level of the market (e.g. the supply level of one product at any given price level from ALL SUPPLIERS in the market
Give 2 examples of factors influencing AGGREGATE supply
1) Companies leaving or joining the market
2) Current suppliers increase or decrease production(eg. in reaction to price, they might switch to producing a more profitable product if price drops)
Other than price, what are some factors which impact the level of Supply? (ie. if the price stays the same)
(*think as if you were the supplier hence want to make max profits per unit, what would impact how much goods you produce/supply?)
1) Costs associated with making the good/service - e.g. price of raw materials, or factors of production (labour, land, interest rate, profit expectations). As these costs increase, profitability per unit will decrease and hence quantity supplied decreases.
2) Price of substitutes - includes products that a company can readily/easily switch to producing (substitutes in supply) - changes in the price or cost of production for substitutes will alter supply
3) Market expectations - if suppliers expect prices will increase in the medium term, they may wait until the prices increase before releasing their products onto the market hence lower current supply
4) Number of competitors/companies in industry - as the number of companies rises, the level of supply increases
5) Technological changes - tech changes that affect the cost of production
6) Climate/weather - primarily affects companies int he primary sector (agriculture, building, oil extraction) - if weather conditions are good there is an increase in supply and visa versa
How do factors - other than price - impact the the supply curve?
(i.e. even if the price remains the same)
the supply curve Shifts to the RIGHT (increase in supply) or LEFT (decrease)
Definition: Equilibrium price
The price at which MARKET SUPPLY and MARKET DEMAND are balanced
What impacts the equilibrium price?
A change in market demand or market supply.
note. market mechanism ensure point of disequilibrium (where the supply and demand curves do not intersect ) only exist in the short term hence both price and demand eventually meet at the equilibrium price.
What will be the impact on supply/demand if the maximum price is set below the equilibrium?
Excess demand / shortage of supply
demand is greater than supply - suppliers sell their product a higher price so prices rise, eventually settling at the equilibrium price
What will be the impact on supply/demand if the minimum price is set above the equilibrium?
Excess/ surplus supply
supply is greater than demand- suppliers sell their excess stock at a cheaper price, with prices eventually falling to the equilibrium price
what is the right word to complete the sentence
“ —- is the long run end point”
Equilibrium
In terms of demand and supply, what is the best way to make a company profitable?
Increase demand - shift of demand curve to the right hence both the equilibrium price and quantity demanded increases therefore total expenditure increases.
increasing the supply does not necessarily increase the profitability as it can push the price down (the equilibrium price drops /supply curve shifts to the right) can see this if you plot both the supply and demand curves graphically
