Demand and Supply Flashcards
definition demand
The willingness and ability to purchase a quantity of a good or service at a certain price.
The demand curve is
the market demand curve
what determines demand
- price
- price of related goods
- consumer income
- fashion
- population
effect on demand curve
Price = movement along the curve
any other factor= shift the curve
shift in the demand curve
change in the price of related good
subsitutes
complements
normal goods (rise income = demand increase)
inferior good (rise income = demand decrease)
Linear Demand function
Qd = a-bP
a is the Q intercept when P = 0
-b is the slope of the demand line
demand schedule
table with QD to Price
market demand definition
the sum of all the individual demand for a product from buyers in the market.
supply definition
A stock that can made for consumers with the necessary resource
determinants of supply
price cost of production number of producer technology government legislqtion price of related god
effects on supply curve
price = movement along the curve
any other = shift
shift in the supply curve
cost of production
change price of other firms
linear supply function
Qs=c+dP
c is the shift of the curve
+d make it more or less steep
price determination on the market
market equilibrium = surplus S bigger than D
shortage = supply lower than D
Market clearing price
free market force to come back to equilibrium
factors of production
land, labor, capital, entrepreneurship: resources necessary to create goods and services within an economy
consumer surplus
The difference between what consumers are willing tot pay and the market price. DIAGRAM TO DRAW
producer surplus
The difference in the amount that a producers receives and the minimum price they are willing to sell at. DIAGRAM TO DRAW
total surplus
sum of consumer surplus and producer surplus.
functions of price
- adam smith invisible hand
- price mechanism
- rationing
- signaling
- incentive
adam smith invisible hand
unobservable market force that helps the demand and supply of of goods in a free market to reach equilibrium automatically.
price mechanism
is the process by which prices rise or fall as a result of changes in demand and supply.
the rationing function of price
In a free economy, resources are allocated based on the price: High demand and low supply = high price
low demand and high supply = low price
the signaling function of price
Prices acts as important information for buyers and sellers
the incentive function of price
Prices can act as a motivation for buyers and sellers.
interest definition
financial gain; the difference between amount earned and the cost of production (amount spent)
profit definition
the return on investment in capital equipment
