Demand and Supply Flashcards
What is meant by Demand, Supply and Equilibrium
Demand refers to the amount of a good or service that consumers are willing and able to purchase at a given price
Supply refers to the amount of a good or service that firms are willing and able to produce and sell at a given price
Equilibrium is the state in which the market price and the quantity of goods and services supplied are equal to the quantity demanded by consumers.
Explain how Demand and Supply interact to establish equilibrium
The interaction between demand and supply determines the market equilibrium price and quantity. In a perfectly competitive market, the price of a good or service is determined by the interaction of buyers and sellers. When the price of a good is high, consumers will demand less of it, while firms will supply more of it. When the price of a good is low, consumers will demand more of it, while firms will supply less of it.
Determinants of Demand and Supply
Demand :
Price of related goods: The demand for a good is influenced by the prices of related goods, such as substitutes or complements. For example, an increase in the price of coffee may increase the demand for tea, which is a substitute for coffee.
Consumer income: An increase in consumer income will typically lead to an increase in demand for most goods, as consumers will have more money to spend.
Consumer tastes and preferences: Consumer tastes and preferences can greatly impact the demand for a good. For example, if there is a shift in consumer preferences towards healthier food, there may be an increase in demand for fruits and vegetables.
Consumer expectations: Consumer expectations about future prices, income, and other economic conditions can affect demand. For example, if consumers expect prices to rise in the future, they may increase their demand for goods in the present.
Supply:
Input prices: The cost of inputs, such as labor and raw materials, affects the cost of production and therefore the quantity supplied. An increase in input prices will lead to a decrease in the quantity supplied.
Technology: Advances in technology can increase the efficiency of production, leading to an increase in the quantity supplied.
Expectations about future prices: Firms’ expectations about future prices can affect their decision to supply a good. For example, if firms expect prices to rise in the future, they may increase their production and supply of a good in the present.
Government policies: Government policies, such as taxes, subsidies, and regulations, can affect the supply of a good. For example, a tax on the production of a good may lead to a decrease in the quantity supplied.
How do changes in the determinants of Demand and Supply affect price and output decisions
When a determinant of demand changes, the demand curve shifts either to the right (an increase in demand) or to the left (a decrease in demand). When the demand curve shifts to the right, this means that consumers are willing and able to purchase more of the good at each price, leading to an increase in the market equilibrium price and quantity. Conversely, when the demand curve shifts to the left, this means that consumers are willing and able to purchase less of the good at each price, leading to a decrease in the market equilibrium price and quantity.
Similarly, when a determinant of supply changes, the supply curve shifts either to the right (an increase in supply) or to the left (a decrease in supply). When the supply curve shifts to the right, this means that firms are able to produce and sell more of the good at each price, leading to a decrease in the market equilibrium price and an increase in the market equilibrium quantity. Conversely, when the supply curve shifts to the left, this means that firms are able to produce and sell less of the good at each price, leading to an increase in the market equilibrium price and a decrease in the market equilibrium quantity.
Evaluate the factors which affect demand and supply in a market
Magnitude
Price of Technology
The severity of government policies
Constantly changing trends
Evaluate the effect of excesses and shortages in a market.
Excess supply (also known as a surplus) occurs when the quantity supplied of a good is greater than the quantity demanded at the prevailing market price. In this case, the market price will tend to fall as producers reduce their prices to encourage consumers to buy their goods. This can lead to lower profits for producers and potentially result in some firms leaving the market.
Excess demand (also known as a shortage) occurs when the quantity demanded of a good is greater than the quantity supplied at the prevailing market price. In this case, the market price will tend to rise as consumers bid up the price of the good. This can lead to higher profits for producers, but also to higher prices for consumers.
