Chapter 3 Flashcards
Defn. Demand
the amount of goods and services consumers are willing and able to buy at various prices over a period of time, ceteris paribus
Law of Demand
states that in a given time period, the quantity demanded of a good is inversely related to its price, ceteris paribus
Law of diminishing marginal utility
explains that incremental units of satisfaction/utility diminishes as an individual consumes more units of a good
Defn. Supply
the amount of goods and services producers are willing and able to sell over a given period of time, ceteris paribus
Law of supply
states that in a given time period, the quantity supplied of a good is directly related to its price, ceteris paribus
Factors affecting DD
- Changes in expectation of future prices
- Changes in govt. policies
- Changes in consumer’s income
- Changes in price of related goods/ population
- Changes in consumer’s taste and preference
- Others - change in season, availability of credit and hire purchases
EGYPTO
Normal goods
when income increases, purchasing power increases, dd curve for normal goods shift to the right (eg. new furniture)
Inferior goods
Inferior goods: when income increases, purchasing power decreases, dd curve for inferior goods shift to the left (eg. second-hand furniture)
Substitute goods
an alternative good that can replace another because it satisfies the same wants
-> change in price for one of the good causes the demand for the other good to change in the same direction
Complementary goods
a good which must be used at the same time with another to satisfy the same wants
-> change in price for one of the good causes demand for the other good to change in the opposite direction
Factors affecting SS
- Changes in weather conditions
- Changes in expectation of future prices
- Changes in technology
- Changes in production of related goods
5.Changes in price of factor inputs (factors of production - land, labour, capital, entrepreneurship) - Changes in gov. policies
- Changes in no. of suppliers
WETPIGS
Goods in competitive/ substitute supply
a good that uses some of the same resources as another good under consideration (eg. butter and cheese because milk)
Goods in joint supply
where production of more of one good leads to the production of more of the other good (eg. beef and leather)
Consumer surplus
Difference between what the consumer is willing and able to pay for a good and the actual price paid for it.
Producer surplus
Difference between actual price received for supplying a good and what the producer is willing and able to accept for supplying a good.
Total surplus
= Consumer surplus + Producer surplus
Price adjustment process
An increase in demand will shift the demand curve rightwards from D0 to D1.
At the original price, P0, this creates a shortage of Q0Q2 since quantity demand (Q2) exceeds quantity supplied (Q0).
The shortage puts an upward pressure on price, causing quantity supplied to rise and quantity demanded to fall.
The adjustment process continues until the new equilibrium price and quantity is reached at P1 and Q1 respectively
Hence, an increase in demand causes a rise in equilibrium price from P0 to P1 and equilibrium quantity from Q0 to Q1
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An increase in supply shifts the supply curve rightwards from S0 to S1.
At the original price P0, this creates a surplus of Q2Q0 since quantity supplied (Q0) excess quantity demanded (Q2).
The surplus puts a downward pressure on price, causing quantity demanded to rise and quantity supplied to fall,
The adjustment process continues until the new equilibrium price and quantity is reached at P1 and Q1 respectively.
Hence, an increase in supply causes a fall in equilibrium price from P0 to P1 and equilibrium quantity from Q0 to Q1.
Causes of shortage
- Unanticipated rise in demand
- Unanticipated reduction in supply
- Underestimation of demand by producers producing goods
- Government intervention such as price ceiling
Effects of shortage
- Queuing
- Panic buying and rationing
- Formation of resale market and black market
Causes of surplus
- Unanticipated rise in supply
- Unanticipated fall in demand
- Overestimation of demand by producers producing goods
- Government intervention such as price floor
Effects of surplus
- Wastage of resources
- Rising cost for firms
Defn. Allocative efficiency
There is an optimal amount of each good and service being produced and consumed. occurs when total surplus is at its maximum
