Demand, Supply and Equilbrium Flashcards
Define ‘demand’.
The willingness and ability to buy a good or service at a given price
What are the 2 ‘Golden Rules’ of demand?
Any movement along the demand curve is price-related
Everything non-price related causes a shift
What are the 7 factors affecting demand?
Population Advertising Substitutes Income Fashion/trend/preference Interest rates Complements
How does population affect demand?
Direct relationship - as population increases, so does the demand for goods and services
How does advertising affect demand?
It increases customer awareness, therefore increasing demand for the good/service
How do substitutes affect demand?
If the price of a good increases, its demand decreases as its substitutes will be cheaper.
What are normal goods?
Goods for which demand will increase if income increases (eg. luxury goods)
What are inferior goods?
Goods for which demand will increase if income decreases
How does income affect demand?
Normal goods - Direct relationship
Inferior goods - Inverse relationship
How does fashion/trends/preference affect demand?
If a good/service is fashionable, demand for it will increase.
How do interest rates affect demand?
Inverse relationship - as they increase, demand for goods/services decreases
How do complements affect demand?
When the demand of a good increases, so does the demand of its complementary good.
What is a substitute good?
A good bought as an alternative to another but performs the same function
What are complementary goods?
Goods purchased together as they are consumed together
Define ‘supply’.
The willingness and ability of producers to sell a good/service at a given price
What are the two ‘Golden Rules’ of supply?
Any movement along the supply curve is price-related.
Everything else causes a shift.
Name the seven factors affecting supply.
Productivity Indirect tax No. of firms Technology Subsidies Weather Cost of production
How does productivity affect supply?
Direct relationship - as it increases, so does supply
How does indirect tax affect supply?
Inverse relationship - indirect taxes increase costs of production, therefore reducing supply
How does the number of firms affect supply?
The more firms there are, the more supply is created
How does technology affect supply?
New technology can increase efficiency and reduce cost of production, therefore increasing supply
How do subsidies affect supply?
Subsidies reduce costs of production therefore increasing supply
How does weather affect supply?
Good weather can improve crop yields, increasing supply but bad weather can decrease supply
How does the cost of production affect supply?
If production costs rise, firms will reduce supply as their profits will be reduced
What are subsidies?
Money payments given by the government to firms to reduce their cost of production and prices of goods/services
What is an indirect tax?
Taxes levied on spending (eg. VAT)
What is market equilibrium?
The price at which the market clears (no shortages or surpluses)
How does an increase in demand affect the equilibrium price and quantity?
The equilibrium price and quantity both increase.
How does a decrease in demand affect the equilibrium price and quantity?
The equilibrium price and quantity both decrease.
How does an increase in supply affect the equilibrium price and quantity?
The equilibrium price decreases but the quantity increases.
How does a decrease in supply affect the equilibrium price and quantity?
The equilibrium price increases but the quantity decreases.
