Demand and Supply Flashcards
What are shifts in demand?
- Change in income
- Change in population
- Expected price
- Change in preference and taste
- Change in substitute
- Change in complementary
What role does price have in market economies
- Relative scarcity of goods and services
- Allocate resources in the production of goods and services
- Acts as incentives or signals for producers and entrepreneurs to take risks in organising the factors of production
- Acts as a rationing device in enabling markets to clear.
- Prices are an equilibrating device in markets.
Relative Price
Relative prices reflect the relative opportunity cost of selecting one alternative, relative to another alternative in consumption or production.
Contraction of demand
When an increase in the price of a good or service causes a decrease in quantity demanded. It is shown by an upward movement along the demand curve.
Expansion of demand
When a decrease in the price of a good or service causes an increase in quantity demanded. It is shown by a downward movement along the demand curve
Increase in demand
Movement in the demand curve to the right
This means that consumers are willing and able to buy more of the product at a higher price than before
Decrease in demand
Consumers are willing and able to buy less of the product at each possible price than before.
Lower price - a movement to the left
Factors that cause a shift in demand
Age and population
Expected prices
Expected income
Taste and preferences
Price of other goods/service
What is supply?
The quantity of a good or service that all firms in a particular industry are willing and able to offer for sale at different price levels at a given point in time.
What is market supply?
Some of the individual firm supplies of individual produces at various price levels
What is production?
The supply of goods and services but business firms
What are the six factors affecting market supply?
- The price of the good / service itself
- The price of other goods/services
- The state of technology
- The cost of factor production
- Quantity of goods available
- Climate and seasonal influence
How does the price of the good or service itself affect supply?
- The expected price of a good or service, and its taste/preference (trend) - more or less demand
- Producers’ ability and willingness to supply it.
How does the state of technology affect supply?
- Lower production costs, allowing firms to supply more goods and a given time.
- Allows firms to adjust production runs to quickly accommodate changing demand patterns
How does the change in the cost of factor production affect supply?
Cost down = supply of goods up
What does the law of supply state?
As the price of a certain product rises, the quantity supplied by producers will rise
Why does the law of supply occur?
Profitability for firms within the industry
Growth within the industry, increasing supply
What way does the supply curve slope?
Upwards, left to right
What way does the demand curve slope?
Downwards, right to left
What are the movements along the supply curve called?
Expansions and contractions
Contraction of supply
Is when a decrease in price of a good or service causes a decrease in quantity supplied. it is shown by downward movement along the supply curve.
Expansion of supply
Is when an increase in the price of a good or service causes an increase in quantity supplied. It is shown by an upward movement along the supply curve.
What happens with an increase in supply?
The movement to the right
- More supply
- Lower price sold at
What happens with a decrease in supply?
The movement to the left
- Less supply
- Higher price sold at
What causes an increase in supply?
- Decrease in price of other goods
- Decrease in cost of factors of production
- Increase in quantity of resources available
- Improved technology
- Climate favorable
What causes a decrease in supply?
- Increase in price of other goods
- Increase in cost of factors of production
- Decrease in the quantity of resources available
- Regulations for health and safety
- Climate less favorable
What are the 5 factors affecting the price elasticity of demand?
- Whether the good is a luxury or a necessity
- Whether the good has any close substitutes
- The expenditure on the product as a proportion of income
- The length of time subsequent to a price change
- Whether a good is a habit-forming (addictive) or not
What are the 3 factors affecting the elasticity of supply?
- Ability to hold and store stock
- Excess in capacity
- Time lags after a price change
Outline time lags
The greater amount of time that producers have to respond to a price change, the more elastic the supply for the product
In short run - inelastic
In long run - elastic
Hold and store stock examples
Tables - durable - elastic
Vegetables - perishable - inelastic
