Demand And Supply Flashcards
What is the law of demand?
The law of demand states that as the price of a good or service increases the quantity demanded of that good or service will reduce and that if the price decreases the quantity demanded will increase in a given time period ceteris paribus.
Why does demand fall as price increases?
Falling real income - as goods and services get more expensive the less households can buy with their income
Substitution effect- the price of a good falls because the product is now relatively cheaper than an alternative item
Diminishing marginal utility - the change in satisfaction as more is consumed eg pizza example
Name conditions of demand
Changes in prices of substitutes Changes in prices of complements Changes in income Advertisement Population Expectations of the future Consumer tastes - social and emotional factors Seasonal factors
What is a normal good?
A good for which demand rises as household incomes rise
What are inferior goods?
Goods that demand rises when household incomes decrease
What are complementary goods?
Complementary goods are pairs of goods that if one of the prices increase, the demand for both will fall
What are substitutes
These are goods which are considered to be alternatives , if the price for one rises the demand for the other increases eg coke and Pepsi
What is the law of supply
The law of supply states that as price for a good or service increase the supply increases and as the price decreases the supply decreases for a given time period ceteris paribus
How do you calculate profit
Total revenue - total cost
Name the conditions of supply
Changes in costs of production Changes in technology Government subsidies and taxes Weather/climate Changes in the prices of substitutes Number of producers in a market Random shocks eg war Expectations of future prices
What is market equilibrium ?
It is a state of balance between market demand and supply
Name 4 types of demand
Derived Demand
Joint/complementary demand
Composite demand
Competitive demand
Explain the 4 types of demand
Derived demand is demand for a good or service as a consequence of the demand for something else eg taxi to the cinema
Joint demand is when demand for goods or services that are complementary are interdependent for example a printer and ink cartridges
Composite demand is demand for a good or service that can have many uses eg oil
Competitive demand is observed between the market for substitute goods or services
What does a change in price mean?
Movement up or down the demand or supply curve.
