Demand supply Flashcards
What does a supply demand model show?
“how supply and demand determine prices in a market economy
how prices allocate the economy’s scarce resources”
How does the market economy allocate resources?
decentralised decisions of households and firms as they interact in markets for goods and services
What is a market?
group of buyers and sellers of a particular good or service
What is the characteristic of a perfectly competitive market?
“goods and services are practically identical
buyers and sellers are so numerous that no one can affect the market price
everyone is a price taker”
What is quantity demanded?
amount of a good that buyers are willing and able to purchase
What is law of demand?
“as the price of good increases, the quantity demanded of a good falls, CETERIS PARIBUS.
Because people respond to changes in cost and benefit”
What is a demand schedule?
shows the relationship between the price of a good and the quantity demanded
What is quantity demanded in the market/
sum of the quantities demanded by all buyers at each price
Explain all non-price determinants of DEMAND
“-number of buyers
- price of related goods
- tastes
- expectations
- income”
Explain how change in income affects demand for both inferior and normal good
“demand for a normal good positive related to income
Inferior good:
negatively related to income
increase/decrease in quantity demanded at each price, shift right”
Explain how expectations affect demand
“If people expect income to rise, their demand for mealas at expensive restaurants may increase now.
If the economy sours and people worry about their future job security, their demand for new cars may fall now”
What is supply?
The quantity supplied of any good is the amount of the good sellers are willing and able to sell.
State the law of supply
“As the price of the good increases, the quantity supplied increases, ceteris paribus
as people respond to changes in cost and benefits
benefit increase”
What is a supply schedule?
shows the relationship between the price of a good and the quantity supplied
What does the supply curve show?
How price affect qunatity supplied, other things being equal
What are the non price determinants of supply
”- Number of sellers
- input prices
- technology
- weather
- expectations”
How does input prices affect supply?
Fall in input prices makes production more profitable at each output price, so firms supply a larger quantity at each price, and the S curve shifts right
How does technology affect supply?
“Technology determines how many units of input is required to produce a unit of output
- cost saving technological improvement results in fall in input prices and shifts S curve to the right
- it saves time, it speeds up the process
- instead of paying worker an hourly wage and produce 1 unit, now he can produce 100 units
- get more out of unit of labour, 1 unit of labour produceds more output, cost goes down, peopel respond to changes in cost and benefits”
How does weather affect supply?
”- important factor in agricultural commodities
- good weather increase harvest”
How does expectrations affect supply?
sellers may adjust the supply (of non perishable goods) when their expectations of futre prices changes
what is equilibrium and when is it achieved/
“Equilibrium is a state in which opposing forces are balannced so that one is not greater than the otgher.
P has reached the level where Qs = Qd”
What happens when sellers face a surplus
“Facing a surplus, sellers lower the price,
- causing Q D to rise and Q S to fall
- reduces the surplus
- where excess surplus has been sold off
- prices continue to fall until the market reaches equilibrium”
What happens when there is a shortage
“Facing a shortage, sellers raise the price,
causing Q D to fall and Q S to rise, which reduces the shortage.
- Prices continue to rise until the market reaches equilibrium.”
What is the difference between the quantity supplied and supply?
“Quantity supplied: point or numebr on a curve
supply: function that contains quantity supplied”
