demand and supply Flashcards
what are supply and demand?
- forces that make market economies work
- determine the quantity of each good produced and the price at which it is sold
- before implementing an event or policy, you must first think about how it will impact demand and supply
- supply and demand refer to behaviour of people as they interact with one another in markets
what is a market?
groups of buyers and sellers of a particular good or service
what is a competitive market?
a market in which there are many buyers and sellers so that each has a negligible impact on the market price.
e.g. competitive market for milk - each producer has limited control over price because other sellers are offering almost identical milk
e.g. non-competitive market: netflix, hulu, amazon for online streaming
small number of providers -> each provider is big enough to affect market price
what are perfectly competitive markets?
- goods being offered for sale are identical for all sellers
- buyers or sellers are so numerous that no single buyer or seller can influence the market price (they are”price takers”)
what is individual/market demand?
people have unlimited needs/wants for goods and services
demand reflects a decision about which needs/wishes to satisfy
individual demand is the amount of a good that an individual is willing and able to purchase within a give time period
market demand is the amount of a good that all buyers are willing and able to buy within a given period of time
what are the factors affecting individual demand
price
income
price of related goods
tastes
expectations
advertising
what is the law of demand
other things being equal, the quantity demanded of a good falls when the price of a good rises = quantity demanded is negatively related to the price
how does income affect individual demand?
if the demand for a good increases when income increases, the good is called a normal good e.g. pizza
If the demand for a good falls when income increases, the good is called an inferior good e.g. frozen pizza
how does the price of related goods affect individual demand?
substitutes: two goods for which an increase in the price of one good leads to an increase in demand for the other e.g. pizza and pasta
complements: two goods for which an increase in the price for one good leads to a decrease in the demand for the other good
e.g. pizza and beer
how do tastes affect individual demand?
if you like something, you buy more of it
how do expectations affect individual demand?
if you expect to earn a higher income next month, you may save less this month and buy more pizza.
if you expect the price of pizza to be lower next week, you may be less willing to buy a pizza at today’s price
how does advertising affect individual demand?
if a firm is having an advertising campaign, the demand for the product will rise
what is a demand schedule?
table that shows the relationship between the price of a good and the quantity demanded, when all other variables affecting demand are held constant
demand curve: graph of the relationship between the price of the good and the quantity demanded, when all other variables affecting demand are held constant
what affects market demand?
- factors which affect individual demand
- number of buyers
market demand is found by adding horizontally the individual demand curves
what are demand changes?
when the price changes, Qd changes, this is a movement along a demand curve
when a non-price determinant changes, the demand schedule/curve changes, this is a shift of the demand curve
what is supply?
the quantity supplied of any good or service is the amount that sellers are willing and able to sell at a given price in a given period of time?
what is individual supply?
the amount that one particular firm is willing and able to sell
what determines individual supply?
- price of the good
- input prices
- technology
- expectations
- natural/social factors
- profitability of other goods in production and prices of goods in joint supply
what is the law of supply?
other things being equal, the quantity supplied of a good rises when the price of a good rises
how do input prices affect individual supply?
when the price of one or more inputs rises, producing pizza becomes less profitable so the firm should produce less pizzas
the quantity supplied of a good is negatively related to the price of inputs used to make that good
how does technology affect individual supply?
an advancement in technology that reduces firms’ cost (e.g. less workers needed to produce same number of pizzas) will make producing pizzas more profitable and thus raise the quantity of pizza supplied.
how do expectations affect individual supply?
if the firm expects the price of pizza to increase in the future, it will put some of its current production into storage and supply less to the market today
how do natural/social factors individual supply?
- flood or drought reduces agricultural production
- impact covid-crisis on cinemas
how do the profitability of other goods in production and prices of goods in joint supply affect individual supply?
firms have some flexibility in their supply and can sometimes switch production to other goods that might be more profitable
sometimes goods are in joint supply e.g. lamb and wool
an increase in the supply of lamb will also lead to an increase in the supply of wool
what is the supply schedule?
a table showing the relationship between the price of the good and the quantity supplied when all other variables affecting supply are held constant
what is a supply curve?
graph of the relationship between the price of a good and the quantity supplied when all other variables affecting supply are held constant
what is market supply?
- sum of all individual supplies for a particular good or service
- found by adding horizontally the individual supply curves
- it shows the total quantity supplied of a good varies as the price of the good varies
what does market supply depend on:
factors affecting individual supply and number of sellers
what are supply changes
when the price changes, the quantity supplied changes, this is a movement along the supply curve
when a non-price determinant changes, supply changes, this is a shift of the supply curve.
