Demand and Supply Flashcards
Define demand
Demand is the amount of a good that a consumer is willing and able to buy at a given price over a given period of time
Describe the relationship between quantity demanded and price
Quantity demanded and price have a negative relationship. When one increases, the other decreases
How does the demand curve look
The demand curve is a downwards sloping curve, indicating the negative relationship between price and quantity demanded
What happens when the price of a good increases
When the price of a good increases, there is a contraction of demand
What happens when the price of a good decreases
When the price of a good decreases, there is an extension of demand
Name the factors that might cause a shift of the demand curve
Changes in income
Change in price of a substitute good
Change in price of a complementary good
Advertising
Changes in population size and structure
Taxes
Changes in tastes
Interest rates
Speculation
How do changes in income affect demand
As income rises, people have more disposable income and they thus can afford to buy more goods. This leads to an increase in demand as more people are willing and able to buy goods
How do changes in price of a substitute good affect demand
Substitute goods are goods in competitive demand, meaning that you only buy one or the other. When the price of a good increases and its demand falls, demand for its substitute good will increase. This is because these goods cannot be consumed together, and therefore when less people start buying the one, more will start buying the other
How do changes in price of complementary goods affect demand
Complementary goods are goods in joint demand, meaning that we demand and buy them together. If the price of a good increases and demand for it falls, demand for its complementary good will fall as well. This is because the total cost of buying the two went up, so even if the price of one good stays the same, demand will fall since they are bought together
How does advertising affect demand
Advertising creates a want for a good. Advertisers successfully make a good look appealing, encouraging consumers to buy it. Consumers become attracted to it and are interested in buying it, increasing demand
How do changes in population size and structure affect demand
When the population of a country increases, there are more people there to buy a good. Thus, demand for goods tends to increase. Also, if the population of specific groups, like women or elderly people increase, then demand for goods made for them will increase as well
How do taxes affect demand
Taxes such as income tax are taxes that take money from the income of consumers. Thus, if income tax increases consumers will have less disposable income and they will consequently be willing and able to buy less goods, causing demand to fall
How do changes in tastes affect demand
When tastes change and a product becomes popular, more people start buying it, increasing demand
How do interest rates affect demand
Interest rates are the cost of borrowing or the reward for saving money. If interest rates increase, consumers will have to return more money when taking a loan and will earn more money from saving. This encourages consumers to save their money instead of taking loans and spending, resulting in demand falling
What are two reasons that might lead to an increase in demand
Changes in income, advertising
What are two reasons that might lead to a decrease in demand
Changes in income, taxes
Define supply
Supply is the amount of goods that producers are willing and able to sell at a given price over a given period of time
Describe the relationship between quantity supplied and price
Quantity supplied and price have a positive relationship. When one increases, the other increases as well
Name the factors that affect supply
Changes in costs of production
Technical progress
Change in price of goods in joint supply
Change in price of goods in competitive supply
Unfavorable weather condition
Indirect taxes
Subsidies
Number of firms
Productivity
How do changes in costs of production affect supply
When costs of production increase, consumers make less profit from selling a good. They are thus willing to supply less at a given price, resulting in a fall in supply
How does technical progress affect supply
Advancements in technology allow producers to use other methods that are more efficient in production. This leads to a fall in average production costs, allowing producers to supply more as they can make more profits. Therefore, supply increases
What is the market equilibrium
Market equilibrium is the price where supply equals demand
What happens when demand for a good exceeds supply
When demand for a good exceeds supply, a shortage develops. This will lead to an increase in its price
What happens when supply for a good exceeds demand
When supply for a good exceeds demand, there will be a surplus, resulting in a fall in price
Give an example of complementary goods
Televisions and television remotes
Give an example of substitute goods
Samsung and iPhone
Give an example of goods in derived demand
Tables and wood
What is the price mechanism
Price mechanism are the forces of demand and supply that determine price and allocation resources
What are the three functions of the price mechanism
The signalling function
Incentive
The rationing function
What is the signalling function
The signalling function signals producers through an increase in price that demand is high and that they should increase production
What is the incentive function
When prices are high, producers are attracted to the market as it can enable them higher profits
What is the rationing function
Due to the fact that resources are scarce, when demand is greater than supply prices are bid up so that the good is rationed out only to those who can afford to pay
What is the dependency ratio and what is its formula
The dependency ratio is the ratio that compares the number of people at work with the total population of a country
dependency ratio: total population / number of people at work
What are the effects of a change in the size of a population
Firms: Increased demand for products, Increased availability of workers
Government: Government gets more revenue from taxes, Government needs to provide more public goods like hospitals and schools
Economy: Increased economic growth, Prices of all goods and services increase
What are the effects of a change in the age of a population
Firms: If population is ageing, firms will sell goods for the elderly, More workers available for jobs that require experience
Government: Increased dependency so government spending increases (pensions)
Economy: Productivity in sectors that require young people falls if population is ageing
What are the effects of a change in the age of a population
Firms: If population is ageing, firms will sell goods for the elderly, More workers available for jobs that require experience
Government: Increased dependency so government spending increases (pensions)
Economy: Productivity in sectors that require young people falls if population is ageing
Define ageing population
An ageing population is the general increase in the average age of the population due to falling birth and death rates
Why do developing countries have bigger birth rates
Labor intensive market
Bigger chance of children dying
Lack of contraception
What are taxes
Taxes are compulsory charges set by the government on goods with the purpose of raising funds for government spending
What is a direct tax
A direct tax is a tax paid directly on an individual or business (eg, income tax)
What is an indirect tax
An indirect tax is a tax set on the expenditure of goods and services. It raises the price of a good and also the cost of production
What is an ad valorem tax
An ad valorem tax is a tax charged as a percentage of the price of a good. It causes a pivotal rotation of the supply curve to the left
