Demand and Supply Flashcards
Define market
a set of arrangements that allows transactions to take place
Define demand
the quantity of a good or service that consumes are willing and able to buy at any possible price in a given period
Define derived demand
demand for a factor of production or a good which derives not from the factor or the good itself, but from the good it produces
Define joint demand
demand for goods which are interdependent, such that they are demanded together
Define composite demand
demand for a good or service that has multiple uses
Define competitive demand
demand for goods which are in competition with each other
What is a sub market
smaller markets that make up a market e.g. market for teachers is a sub market of labour
What are the determinants of demand
price, price of other goods, RDI, consumer tastes and fashion
Demand analysis
The factors that affect individual demand for a good determine the level of demand an individual has for a good. The individual may demand none, one or many units of a good - and this can change over time based on the four factors. A market is made up of many buyers all acting on their individual demand. incomes and preferences very between individuals, and this leads to different prices at which individuals will buy a particular good; some consumers will buy at a higher price, and others will only buy at a lower price. By combining individual demand, we derive market demand.
What is the law of demand
a law that states that there is an inverse relationship between quantity demanded and the price of a good or service, ceteris paribus
Define substitutes
2 goods are said to be substitutes if consumers regard them as alternatives, so that the demand for one good is likely to rise if the price of the other good rises
Define complements
2 goods are said to be complements if people tend to consume them jointly, so that an increase in the price of one good causes the demand for the other good to fall
What is an extension
a movement along the demand curve to the right
What is a contraction
a movement along the demand curve to the left
What is the income effect
ceteris paribus, as a price falls the amount that consumers can buy with their income increases - causing an increase in demand
What is the substitution effect
ceteris paribus, a fall in the price of a good makes it cheaper than before, compared to other goods - this causes an increase in demand for the cheaper good and a decrease in demand for the more expensive good
Demand curve analysis
D curve slopes downwards because marginal utility decreases with each extra good consumed, and therefore the price consumers are willing to pay, for each extra good, decreases. Diminishing marginal utility leads to the law of demand.
Define consumer surplus
the value that consumers gain from consuming a good or service over and above the price paid
Define firm
an organisation that brings together factors of production in order to produce output
Define competitive market
a market in which individual firms cannot influence the price of the good or service they are selling, because of competition from other firms
Define competitive supply
a situation in which a firm can use its factors of production to produce alternative products
Define joint supply
where a firm produces more than one product together
Define composite supply
where a product produced by a firm serves more than one market
Define supply
the amount that a firm is willing and able to supply at a given price
Analysis of supply
We assume that producers aim to maximise their profits so all things being equal, the higher the price for a good or service, the higher the profit. Higher profits, therefore, incentivizes producers to increase production and increases supply. Therefore, the quantity supplied of a good or service.
Increased supply increases costs and, due to diminishing marginal returns to factors of production, the number of firms that will enter the market and supply the product will fall as supply increases. Therefore, the required incentive will rise to encourage more production and more firms to enter the market to increase supply
Define producer surplus
the difference between the price received by firms for a good or service and the price at which they would have been prepared to supply that good or service.
Define marginal cost
the cost of producing an additional unit of output
What factors cause a shift in the supply curve
- Changes to production cots
- Changes in technology
- Changes to productivity of the factors of production
- Indirect taxes/subsidies
- Changes to price of other/related goods
- number of suppliers
- firms expectations about future prices
define comparative static analysis
examines the effect on equilibrium of a change in the external conditions affecting a market
How are prices in a related market directly related
- Changes in tastes and fashions - one product may become more fashionable and another product only loosely related may also become more fashionable. (D - R)
- Common factors of production - rise in demand in a related market leads to more resources being used so these cost more in other markets (may be passed onto their customers).
- Substitute good -increase in price for a good will lead to consumers switching to a substitute good.
How are prices in a market inversely related
complementary goods - if complementary and consumed together, a price rise in one will lead to a fall in demand for the other
What are the assumptions of supply and demand
- Supply and demand are independent of each other
- Markets are perfectly competitive (homogenous product, large number of firms, no individual firm has market power)
- Ceteris paribus applies (consumer income/preference and population size is static)
How can transport be modelled well with supply/demand
- Homogenous product
2. There are large number of firms
How can transport not be modelled well with supply/demand
- Consumer preferences are not static
2. Have some market power
How can housing be modelled well with supply/demand
- Unchangeable preferences
2. Close substitutes
How can housing not be modelled well with supply/demand
- Few large firms
2. Firms have market power locally
How can oil be modelled well with supply/demand
- homogenous products
2. large number of firms
How can oil not be modelled well with supply/demand
- OPEC has market power
2. Changing preferences
