Demand & Supply Flashcards
State the law of demand, and why it occurs?
– Other things equal (ceteris paribus)
– When the price of a good rises, the quantity demanded of the good falls
– When the price falls, the quantity demanded rises
Income Effect: People will feel poorer (real income has fallen)
Substitution Effect: People will substitute to alternatives
What are exceptions to the law of demand
Giffen Goods:
A product that people consume more of as the price rises and vice versa.
Veblen Goods:
A type of luxury good for which the demand increases as the price increases, in apparent contradiction of the law of demand, resulting in an upward-sloping demand curve.
Essential goods (Insulin)
Using Price as an Index of Quality
Expectation of the future
What is Market demand
– Sum of all individual demands for a good or service
– Market demand curve: sum the individual demand curves horizontally
To find the total quantity demanded at any price, we add the individual quantities.
What are determinants of demand
no of buyers and sellers change in tastes income changes in price of complements and substitutes future expectations
What is the law of supply and why
– Other things equal (ceteris paribus)
– When the price of a good rises, thequantity supplied of the good rises
– When the price falls, the quantity supplied falls
This is because:
firms switch from less profitable goods
in the long run, new firms will be encouraged to enter the market
What are determinants of supply
- costs of production
- number of sellers
- profitability of alternative products (substitutes in supply)
- profitability of goods in joint supply
- nature and other random shocks
- aims of producers
- expectations about the future
what are the basic assumptions of demand and supply
Assuming a free market system
Highly competitive markets (perfect competition)
Price Taker (consumer and producer)
Perfect information
