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IB Economics > Demand & Supply > Flashcards

Demand & Supply Flashcards

1
Q

What is demand? (effective)

A

Demand is the amount of a good/service that a consumer is willing and able to purchase at a given price in a given time period.

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2
Q

What is the law of demand?

A

The law of demand states that there is an inverse relationship between price and quantity demanded (QD), ceteris paribus
-price rises, QD falls.
-price falls, QD rises.

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3
Q

What is market demand?

A

Market demand is the combination of all the individual demand for a good/service.
-adding up all individual demand at each price level.

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4
Q

What three key assumptions is the law of demand based on?

A

The income effect
The substitution effect
The law of diminishing marginal utility

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5
Q

What do the income and substitution effect highlight?

A

They highlight how changes in price affect consumers’ purchasing power and their choices among different goods.

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6
Q

What does the law of diminishing marginal utility explain?

A

It explains why consumers are less willing to pay higher prices for additional units of a good.

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7
Q

What does the income effect refer to?

A

The income effect refers to a change in consumers’ purchasing power resulting from a change in the price of a good/service.
-when the price of a good increases, the purchasing power of consumers decreases as they can afford less of the good with the same income.

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8
Q

What does the income effect assume?

A

The income effect assumes that consumers will adjust their spending matters based on changes in their purchasing power caused by price fluctuations.

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9
Q

What is the substitution effect?

A

The substitution effect suggests that consumers will substitute goods/services that have become relatively more expensive with those that have become relatively less expensive.
-when the price of a good rises, they may seek alternatives that provide similar utility or satisfaction at lower prices.

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10
Q

What is the law of diminishing marginal utility?

A

The law of diminishing marginal utility states that as you consume more of a good or service, the utility (satisfaction) you receive from each additional unit gradually decreases.

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11
Q

What does the substitution effect assume?

A

The substitution effect assumes that consumers are rational decision-makers who have perfect information and respond to changes in relative prices by adjusting their consumption

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12
Q

What is marginal utility?

A

Marginal utility is the additional utility (satisfaction) gained from the consumption of an additional product.

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13
Q

What is an example of the law of diminishing marginal utility?

A

For example, a hungry consumer gains high utility from eating their first hamburger. They are still hungry and purchase a second hamburger but gain less satisfaction from eating it than they did from the first hamburger

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14
Q

How to make a good or service more attractive to consumers so they keep consuming additional units?

A

-Lowering the price, causing a movement down the demand curve.

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15
Q

What causes a movement along a demand curve?

A

A movement along a demand curve is caused by a change in price (ceteris paribus). This causes a change in quantity demanded.

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16
Q

What is a contraction along a demand curve?

A

A contraction along a demand curve is caused by an increase in the price of a good or service (ceteris paribus) meaning less consumers are able to afford the good, leading to a decrease in the quantity demanded for the good.

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17
Q

What are the non-price determinants that cause a shift of the demand curve:

A

-changes in income (real)
-changes in price of related goods (s & c)
-changes in size of market
-future price expectations
-changes in tastes and preferences
-special circumstances

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18
Q

What are substitute goods?

A

Substitute goods are those that can be used for the same purpose by the consumer. (can be used in replacement for another)

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19
Q

What are complementary goods?

A

Complementary goods are two products that a consumer uses together.

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20
Q

What are normal goods?

A

Normal goods are goods that experience an increase in demand due to an increase in consumer’s income. e.g. clothing

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21
Q

What are inferior goods?

A

Inferior goods are goods that experience a decrease in demand due to an increase in a consumer’s income. e.g. instant noodles

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22
Q

What are unrelated goods?

A

Unrelated goods are products that have no connection or relation to each other and do not affect each other in any way. e.g. tomatoes and skirts.

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23
Q

What is supply? (effective)

A

Supply is the amount of a good or service that a producer is willing and able to supply at any price in a given time period.

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24
Q

What is the relationship between price and quantity supplied?

A

As the supply curve is sloping upward, there is a positive (direct) relationship between price and quantity supplied.

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25
Q

What is the goal of rational profit maximising producers?

A

Rational profit maximising producers would want to supply more as prices increase in order to maximise their profits.

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26
Q

What is the law of supply?

A

The law of supply state that there is a positive relationship between quantity supplied and price (ceteris paribus).
-when the price rises QS rises.
-when the price falls QS falls.

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27
Q

What is market supply?

A

market supply is the combination of all the individual supply for a good/service
-adding up the individual supply at each price level.

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28
Q

What two key assumptions is the law of supply based on?

A

-the law of diminishing marginal returns
-increasing marginal costs

29
Q

What do both assumptions of the law of supply focus on?

A

both the law of diminishing marginal returns and increasing marginal costs focus on the cost-related factors that influence the supply decisions of producers.

30
Q

What is the law of diminishing marginal returns?

A

The law of diminishing marginal returns states that adding more of one input (like labor or materials - variable) to a fixed amount of other resources will eventually produce smaller increases in output (less productive).

31
Q

Give an example of the law of diminishing returns.

A

E.g. consider a farmer who has a fixed amount of land and hires additional workers to cultivate the crops
Initially, each additional worker contributes to a significant increase in crop output
However, as more workers are hired, the additional output generated by each new worker starts to decline
This is because the fixed amount of land and other resources become increasingly crowded relative to the growing labor force, leading to diminishing returns from each additional worker

32
Q

How does the law of diminishing marginal returns relate to the law of supply?

A

The law of diminishing marginal returns explains why production costs rise as more resources are added, making each extra unit of output less efficient. This relationship affects the law of supply by limiting how much producers are willing to supply at any given price. As costs increase with more production, higher prices are needed to motivate further supply, leading to an upward-sloping supply curve.

33
Q

What are increasing marginal costs?

A

The concept that as a producer increases the quantity of a good/service supplied, the additional cost of producing each additional unit also increases.

34
Q

Give an example of increasing marginal costs.

A

Imagine you’re baking cookies. The first few batches are cheap and easy to make because you have enough space and all the ingredients are ready. But as you keep baking, you start running out of ingredients, or maybe your oven can’t handle more batches efficiently. Now, each new batch costs more in terms of time, ingredients, or effort.

35
Q

How is the concept of increasing marginal costs reflected in the law of supply (supply curve)?

A

The concept of increasing marginal costs is reflected in the upward sloping supply curve as producers are more willing to supply a greater quantity at higher prices to justify the higher costs of production.

36
Q

What is a movement along a supply curve?

A

A movement along a supply curve is when there is a change in price (ceteris paribus). This will impact the quantity supplied.

37
Q

What is an extension along a supply curve?

A

An extension along a supply curve is when prices increase, meaning producers are more willing and able to produce more of the good/service, causing an extension in QS.

38
Q

What are the non-price determinants of supply?

A

-changes to the costs of production
-changes to technology
-changes to the number of firms
-weather events
-future price expectations
-goods in joint supply
goods in competitive supply
supply shock
-changes in indirect taxes and subsidies (govt intervention)
-price of other products that could be produced.

39
Q

What do changes to any of the non price determinants of supply cause?

A

They will cause a shift of the entire supply curve.

40
Q

What is joint supply?

A

Join supply occurs when the supply of two different goods stems from the same source (beef and cow leather).
-occurs when the production of one good automatically results in the production of another. e.g. farmer raises sheep, both wool and meat are produced.

41
Q

How does joint supply cause a shift of the supply curve?

A

When there is an increase of supply of one good in joint supply (e.g. beef), possibly due to higher prices, there will be an increase in supply of the other good too (e.g. leather).
Thus, when demand for one product increases, producers have an incentive to produce more of it, which also means more of the jointly supplied product will be available, shifting its supply curve to the right (increasing supply).

42
Q

What is competitive supply?

A

Competitive supply occurs when the factors of production can be used to produce different goods so that the increased in the supply of one requires a decrease in the supply of another.

43
Q

How are prices for goods/services determined in a market system?

A

In a market system, prices for goods/services are determined by the interaction of demand and supply

44
Q

What is a market?

A

A market is any place that brings buyers and sellers together.

45
Q

How do buyers and sellers meet to trade at an agreed price?

A

-Buyers agree the price by purchasing the good/service
-If they do not agree on the price then they do not purchase the good/service and are exercising their consumer sovereignty
-based on this, sellers will adjust their price so there is an equilibrium price and quantity that works for both.

46
Q

What is true at the equilibrium price?

A

-At the equilibrium price, sellers will be satisfied with the rate/quantity of sales
-At the equilibrium price, buyers are satisfied with the utility that the product provides

47
Q

What is a synonym for equilibrium price?

A

Market clearing price

48
Q

When does disequilibrium occur?

A

Disequilibrium occurs whenever there is excess demand or excess supply in a market
-below or above the equilibrium on a diagram.

49
Q

What is a shortage/excess demand?

A

A shortage is when there is excess demand. It can occur when prices are too low or when demand is too high that supply cannot keep up with it.

50
Q

What will sellers do when there is a shortage?

A

-gradually increase prices as they can generate more revenue and profits.
-causes a contraction in QD as some buyers are now no longer able to purchase it.
-this causes an extension in QS as other sellers are more incentivised to supply at higher prices.
-in time, the market will have cleared the excess demand and reached equilibrium.

51
Q

What is a surplus/excess supply?

A

A surplus is when there is excess supply. It can occur when prices are too high or when demand falls unexpectedly.

52
Q

What will sellers do when there is a surplus?

A

-they will gradually lower prices to generate more revenue.
-this causes a contraction in QS as some sellers no longer desire to supply masks.
-this causes an extension in QD as buyers are more willing to purchase it at lower prices.
-in time, the market will have cleared the excess supply and reach equilibrium.

53
Q

what is the rule about shortages and surpluses?

A

-shortages arise when the price is BELOW equilibrium
-surpluses arise when the price is ABOVE the equilibrium

54
Q

What is the price mechanism?

A

The price mechanism is the interaction of demand and supply in a free market.

55
Q

What does the price mechanism determine?

A

the price mechanism determines prices which are the means by which scarce resources are allocated between competing wants/needs.

56
Q

What two functions does the price mechanism fulfil?

A

-resource allocation
-rationing

57
Q

Explain resource allocation in terms of signalling and incentive:

A

Signalling: this is because prices provide information to producers and consumers about where resources are wanted (markets with increasing prices) and where they are not (markets with decreasing prices).
Incentive: when prices for a good/service rise, it incentivises producers to reallocate resources from a less profitable market to this market in order to maximise their profits. Falling prices incentivise the reallocation of resources to new markets

58
Q

explain rationing

A

prices ration scarce resources.
When resources become scarcer the price will rise further. Only those who can afford to pay for them will receive them
If there is a surplus then prices fall and more consumers can afford them

59
Q

What is the consumer surplus?

A

Consumer surplus is the difference between the amount the consumer is willing to pay for a product and the price they have actually paid

60
Q

What is the producer surplus?

A

Producer surplus is the difference between the amount that the producer is willing to sell a product for and the price they actually do

61
Q

What happens to the producer and consumer surplus when the market is at equilibrium?

A

When the market is at equilibrium, the producer and consumer surplus are maximised.

62
Q

Where do the consumer and producer surplus lie on the diagram?

A

-The consumer surplus lies below the demand curve.
-The producer surplus lies above the supply curve.

63
Q

What does the consumer surplus + producer surplus =

A

social/community surplus

64
Q

what reduces the social surplus?

A

Any disequilibrium

65
Q

How do market changes affect producer and consumer surplus?

A

-Any change to a non-price determinant of supply or demand will cause a shift in the relevant curve
-This shift will change the consumer and producer surplus in the market

66
Q

How can producer and consumer surplus be calculated from a diagram?

A

producer or consumer surplus: b x h : 2

67
Q
A
68
Q

What is productive efficiency?

A

Productive efficiency occurs at the level of output where average costs are minimised.
-no wastage of scarce resources and a high level of factor productivity.

69
Q

What is allocative efficiency?

A

Occurs t the level of output where the marginal utility = marginal cost.
-at this point, resources are allocated in such a way that consumers and producers get the maximum possible benefit.
-no one can be made better off without making someone else worse off.
-no excess demand or supply.

IB Economics (1 decks)

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