Demand And Supply Flashcards
Demand
Demand refers to the quantity of a good or service that consumers are willing and able to buy at various prices over a given period of time, ceteris paribus
Law of demand
States that an inverse relationship exists between the price and quantity demanded of a good, ceteris paribus
Final demand
Demand for good used by end users
Derived demand
Demand for good as an input to produce another good in demand
Complements
Good jointly used to satisfy the same want
Substitutes
Goods that have similar uses which satisfy the same want
Non price determinants of demand
PTIDE Prices of related goods Tastes and preferences Income of consumers Demographics Expectations
Prices of related goods (demand)
Discuss substitutes and complements
Tastes and preferences
Consumption choices are influenced by tastes and preferences, affecting desirability (fashion/fad, advertising, government actions, changes in season/weather, festival etc)
Changes in consumer income
Affects purchasing power.
Identify if it is a normal/inferior good
Demographics
Influences tastes and preferences and potential market size
Population, gender composition, age composition
Changes in expectations
Expectation of future changes in income and price
- If income expected to increase, spending will increase.
- Speculative demand: purchase of goods to earn profit at a later date
Supply
Supply refers to various quantities of a good or service producers are willing and able to offer for sale at various prices over a given period of time, ceteris paribus
Law of supply
States that a direct relationship exists between the price of a good and the quantity supplied of a good, ceteris paribus
Non-price determinants of supply
CPPSE Cost of production Producers (number of) Prices of related goods Supply shock Expectations
Cost of production
1) changes in prices of input (e.g. Electricity)
2) change in state of technology (automation of manual work)
3) changes in productivity (upgrading skills)
4) indirect taxes/subsidies
Changes in prices of related goods (supply)
1) competitive supply
2) joint supply
Number of producers
Increase in number of producers = increase in market supply
When producers deem selling certain goods is a lucrative business ensuring high profit, they will enter the market thus increasing market supply
Supply shocks
1) changes in climatic conditions (floods, droughts)
2) abnormal circumstances (e.g. Political turmoil -> labour unrest)
Producer’s price expectations
If price is expected to rise, producers may temporarily reduce current supply and build up stock, only to release them onto the market when the price does rise
Theoretical conditions in which price and quantity always tend toward market equilibrium
Perfect competition and free from government intervention
Market equilibrium price and quantity
Refers to the price and quantity exchanged where quantity demanded = quantity supplied, ceteris paribus
