Demand and Supply Flashcards
What is demand
The amount of products consumers are willing and able to purchase
What does effective demand curve look like
What does the law of demand state
the higher the price the lower the quality demand
What does the law of demand mean
What does the demand curve look like
consumers are willing and able to buy less as prices rise
Downward slopping curve
What is movement along demand curve caused by
Change in price
What is supply
The amount of product suppliers will offer a market at a given price
What does a supply curve look like
What do suppliers do when the price of an item goes up
Suppliers try to maximise profit by increasing quantity offered for sale
So the lower the price the lower the quantity supplied and the higher the price the higher the quantity
Why is it that lower prices means lower quantity and high prices means higher quantity
At low prices only most efficient suppliers profit so supply is limited
As prices increase profit motive attracts new resources and high price allows less efficient producers to make profit
Describe market equilibrium price graph
On the market equilibrium price graph describe what is happening when the demand and supply curve intersect
It is the point where quantity consumers are willing to purchase matches quantity suppliers are willing to sell
What is this situation known as
market equilibrium
What does market equilibrium allow us to calculate
Market price and market quantity
Is market equilibrium fixed, explain
no it will change over time because of changes in patterns of demand and supply
As well as price which other factors will effect demand and supply for a product
changes in price causes movement up and down the demand and supply curve
Describe the shift in demand curve
Demand curve shifts out to the right, there is more demand at each price level.
D! To D2
Inward shift to left indicates a decrease in demand - less demand at each price level
What factors effect demand
1 increase in consum ermer income is likely to shift demand curve right for normal and luxury goods. Fall in income causes curves to shift in - to the left as demand decreases
2 changes in fashion and trends. If goods become fashionable curve shifts right - increase demand a t each price level. If goods go out of fashion curve shifts left- demand decrease
3 changes in price of goods - complimentary good (goods used alongside goos eg if holidays demand goes up so does demand for sun lotion) and substitute goods eg if train favors rise some people will travel by car and may lead to demand in petrol rifting demand curve for petrol to the right
4 successful advertising campaign can cause curve for product to shift to the right
5 changes in population Uk is an aging population which has resulted in an increase demand for retirement homes
6government legislation - eg legislation passed making child car seats compulsory significantly increases demand
describe the shift in demand curve when there is an increase in price
there is a shift outwards (caused by perhaps increasing incomes or price or substitute goods)
Initially at market equilibrium is P and D. New equilibrium is created D1 which cuts the original supply curve. Prices rise to P1 and quantity demand and supplied expands to Q1
Describe the shift in demand curve when there is a fall in price
What is the impact of the shift of the demand curve
We see shift to left of demand curve ( perhaps cause by fall in price of a substitute)
To start there is equilibrium with price P and quantity Q and after there is a shift in price demand curve.
There is a new equilibrium with P1 and quantity Q1.
The impact of the shift of the demand curve has been reduced price and to cause a contraction in the quantity demanded and supplied
Describe the shifts in supply curve when there is a change in price
ther is a shift outwards of supply curve S2 caused by falling cost.
Initially at market equilibrium we have price P and quantity Q
Shift outwards results in a fall in price to P2 and increased quantity demanded and supplied Q2
ALSO shows a shift of supply curve S1 (perhaps caused by poor harvest)
Initially at market equilibrium we have price P and quantity Q shift to supply curve to left results increase in price to P1 bad fall in quantity demanded and supplied at Q2
Why is it important to understand price elasticity of demand
Business managers need to know the impact of changes in price on likely levels of demand
What will elasticity of demand be like for markets approaching perfect competition
likely to be highly elastic
What does the term highly elastic mean
a change in price will cause a more proportional demand in quantity demanded - price goes up demand falls drastically. Price falls demand increase
In near perfect competition goods are mostly non differentiated. Why is the impact of change in price on demand level predictable PRICE ELASTIC/PRICE SENSTIVE
people will not pay more when they can buy virtually identical goods for a. Lower price
Price inelastic /Price Insensitive
If goods have an inelastic price and inelasticity of demand what does a change in price cause
a less proportional change in quantity of demand
If price goes up demand falls a little if prices go down demand increases a little
When does inelastic price elasticity of demand usually occur
when levels of competition are low
Where the are good substitutes
Goods are necessities or addictive
Why is this
in these circumstances the business has much more control over price than companies in a highly competitive marker
With regard to price elasticity what is the objective of most businesses
to make price elasticity of demand of their goods more inelastic
Why is this their objective
it means they have more control over price - they are the price makers not price takers
What is the result of price elasticity of demand being inelastic and increasing prices
result is a less than proportional fall in quantity demanded resulting in fall of revenue
When can a business make demand for their goods to be price inelastic
1 if they encourage consumer loyalty
2 reduce or restrict competition in the market
3 increase brand value
Elasticity of demand
www.http://bit.ly/1PZGmOf
What is income elasticity
it to how responsive demand is to the changes in income
In business what does the term real mean
Allowing for the implact of inflation
Generally what happens to real incomes over time
They increase leading to increase in wealth and a rise in demands for goods
By linking this pattern of changing demand to changing income what can we measure
Income elasticity of demand for types of goods
What are the 3 states of income elasticity
Income elasticity can be elastic - changes inn income cause mere than a proportional change in quantity demand eg 5% rise in income leads to 10% increase in demand for pizza
Income elasticity of demand can be inelastic - change in income causes less than proportional change in quantity e and eg fall of income of 4% but demand of toothpaste falls by 2%
Income elasticity of demand can be negative - when there is a rise in income causes a fall in demand eg income increases by 5% and there is a fall in demand for supermarket own brand
