Demand and Supply Flashcards
definition of demand and supply:
demand refers to quantities of a good or service that consumers are WILLING AND ABLE to buy the good at various prices over a period of time.
supply refers to the quantities of a good service producers are WILLING AND ABLE to produce the good and offer it the good at various price points over a period of time.
what is the law of demand and law of supply?
the law of demand which states that an INVERSE relationship exists between the price of the product and the quantity demanded of the product.
the law of supply states that there is a DIRECT relationship between the price of the product and the quantity supplied of the good, ceteris paribus.
what are the five factors that shift the SUPPLY curve?
- Number of producers
- Cost of production:
a. changes of price of raw materials
b. changes in state of technology
c. changes in efficiency and productivity - prices of related goods
a. competitive supply: two goods that use the same resources in production, such that only one good can be produced at a time. example: rice and corn
b. joint supply: both goods can be produced at the same time. example: beef and leather. - supply shocks:
a. weather: when there are natural disasters, the supply of crops will be adversely affected. similarly, when there is good weather, the supply of crops will increase.
b. political turmoil - producer’s expectations
what are the five factors that shift the DEMAND curve?
- consumer income(links to YED)
as the consumers income increases, the higher the demand for a good - prices of related goods(links to CED)
- change in tastes and preferences
a. fads: like milk teas and frozen yoghurts
b. advertising or product promotions: like holiday packages
c. government policies and actions: promoting healthy food and discouraging smoking
d: changes in seasons and occasions: flowers and chocolates for Valentine’s Day. - demographics
a. population size
b. age groups
c. gender composition - consumers expectations:
a. expectations in expected incomes: a consumer expecting a rise in income will increase their demand for a good in anticipation of their rise in pay. consumers expecting a fall in income will spend less, thereby reducing their demand for a good in anticipation of the fall in pay.
b. changes in expected prices: when consumer expect the price of a good to decrease at a later date, they will decrease their demand for that good so that they can buy the same good for a lower price later.
what are the elasticity concepts and their determinants?
- PED: price elasticity of demand
it is the measure of the degree of the responsiveness in the change of the quantity demanded of the good to a change in its own price, ceteris paribus. price elastic : ped>1(less steep gradient) price inelastic: ped<1(steeper gradient)
determinants:
a. availability of substitutes: when the number of substitutes increase, the more price elastic the good is.
b. degree of necessity: basic goods: relatively inelastic as it is used in consumers’ daily lives. habitual/addictive goods are price inelastic, even if the prices of that good rises, as they are unlikely to change their consumption habits.
c. proportion of income: the higher proportion the income spent on a good, the more elastic it is, since consumers are unlikely to want to spend even more on the good, and vice versa.
d. time period: the longer the time period, the longer the time consumers have to find cheaper substitutes for the good.
- YED: income elasticity of demand
it is the measure of the degree of the responsiveness in the change of the quantity demanded of the good to a change in the income of consumers, ceteris paribus. income inelastic; 01
determinants:
a. nature of the good: if its a necessity its income elastic 01. people choose to buy luxury goods to enhance the quality of their lives.
b. level of income or affluence of consumers: depending on the level of income of the consumers,
- CED: cross elasticity of demand.
it is the measure of the degree of the responsiveness in the change of the quantity demanded of one good to the change in price of ANOTHER GOOD, ceteris paribus.
CED>0: substitutes CED<0: compliments.
4.PES: price elasticity of supply:
it is the measure of the degree of the responsiveness in the change of the quantity supplied of the good to a change in its own price, ceteris paribus. price elastic : ped>1(less steep gradient) price inelastic: ped<1(steeper gradient)
determinants:
a. spare capacity: possibility of producing goods quickly when raw materials are available, this means that it is price elastic.
b. nature of production: length of production period: the longer it takes to produce a god, like crops, the more price inelastic it is. ease of factor substitution or mobility: when one factor like labor or machines can be easily switched to produce another good, it is price elastic in supply.
c. inventory: when a good can be stored in inventory, it is price elastic as it can be put in the market within a short notice.
4. time period. when there is a longer period of time, producers can produce more to reduce the chances of “supply bottlenecks” occurring, hence it is price elastic in supply.
TAXES: who does a more price elastic demand affect?
producers and consumers when the demand is price inelastic(think in terms of alcohols and cigarettes, consumers pay more)
opposite for PES
PRICE FLOOR AND PRICE CEILINGS: definition
a PRICE FLOOR is a LEGALLY ESTABLISHED MINIMUM PRICE ABOVE THE MARKET EQUILIBRIUM PRICE. the producers are prohibited to sell goods below that price.
this ensures that there will be a minimum wage for workers, usually farmers. government will usually buy up the surplus to raise the equilibrium above the stipulated price floor.
a PRICE CEILING is a LEGALLY ESTABLISHED MAXIMUM PRICE BELOW THE MARKET EQUILIBRIUM PRICE. the producers are prohibited from selling goods above that price.
this ensures that the good remains affordable to the majority and to prevent the exploitation of producers during tough times like war.
