Demand, Supply and Equilibrium in Markets Flashcards
definition: demand
the quantity of a good or service that buyers are willing to buy at a given price at a particular time, ceteris paribus
demand
when price increases, demand decreases
the demand curve maps this relationship
demand reflects real or perceived benefit from producing a good or service
also known as a marginal benefit curve
the income effect
as a good becomes cheaper, our purchasing power (real income) improves that means we can afford to buy more goods for our given (unchanged) actual income
the substitution effect
as a good becomes cheaper relative to other goods, we substitute away from the more expensive goods and toward the cheaper good, and buy more
non price determinants of demand
incomes of buyers (Y)
tastes of buyers (t)
number of buyers (N)
price of related goods (Pr)
expectations of future price changes (Pe)
income
affects the ability to pay, and therefore tends to have a positive effect on demand
can also affect willingness to pay because of a change in preferences = an increase in income can lead to a stronger preference for some goods and a weaker preference to other goods
the effect of income on demand depends on the type of good
- normal goods
- inferior goods
tastes and preferences
affects perceived benefit, and thus willingness to pay
determined by fashion, advertising, information, hype, media, demographics
massive amounts of $$ being spent to try to sway consumers toward certain goods
very subjective, changes can be unpredictable
number of buyers
market demand is the sum of the quantity demanded of all buyers in the market
population = a general increase in the population will tend to increase the number of buyers
demographics = the number of people in particular age - groups can affect the number of buyers for certain
goods and services
price of related goods
substitute goods
- e.g. cornflakes and weetbix; tea and coffee; ipad and samsung tablet
- increase in price of cornflakes decreases quantity demanded for cornflakes and increases quantity demanded for weetbix
- the demand for a good is directly related to the price of a substitute good
complement goods
- e.g. cars and petrol; bikes and bike helmets; weetbix and milk
- increase in price of cars leads to decreased demand for cars and decreased demand for petrol
- the demand for a good is indirectly related to the price of a substitute good
expectations of future price changes
if buyers expect prices to increase in the future, they will increase current demand
if buyers expect prices to decrease in the future, they will withhold current demand
definition: supply
reflects willingness and ability to provide a good or service at a particular price
non price determinants of supply
price of inputs (Pf)
prices of substitutes in production (Pa)
expected future prices (Pe)
the number of firms in the market (N)
prices of inputs
all goods and services require inputs to produce them
if the price of these inputs change, then the overall cost to the producer will also change
an increase in the price of an input will increase overall costs, and so the supply curve will shift to the left and vice versa
technological change
technology represents the stock of knowledge about how to combine resources most efficiently
therefore, an improvement in technology will lead to a decrease in the costs of production for firms which will cause the supply curve to shift right
expected future prices
if firms expect prices to be higher in the future, they may decrease supply now and increase it in the future and vice versa
prices of substitutes in production
here we mean goods that use the same or similar inputs
- land used for dairy cows can sometimes be used for producing crops
- land that was used for food-production prior to the US policies to promote use of ethanol-based fuels was soon converted to grow corn for ethanol production = this lead to a fall in the supply of grains for food production and hence an increase in food prices
change in the number of sellers
the market supply is the sum of the quantity supplied of all sellers in the market
an increase in the number of sellers in the market means that supply shifts right
- e.g. massive increase in the number of wineries in margaret river leads to an increase in the supply of wine grapes
what are markets
markets provide a mechanism whereby resources are allocated among competing claims
there are two sides to a market
- demand = individual organisations willing to pay to procure a good or service
- supply = individuals or organisations willing to provide a good or service for a price
definition: markets
a market describes a situation where buyers and sellers interact to coordinate their competing wants and needs
market equilibrium (ending a surplus and ending a shortage diagrams)
buyers only buy if they perceive that the marginal benefit outweighs the cost
sellers only sell if the price is high enough to cover the cost of producing
this is known as adam smith’s “invisible hand” of resource allocation
the interaction between buyers and sellers in a market results in market equilibrium
equilibrium and disequilibrium
equilibrium occurs when the plans of the buyers match the plans of the sellers = QD equals QS so the market clears
changes in the determinants of demand and supply over time means this equilibrium price and quantity will also change over time
but the effect of these changes in the determinants occur in a predictable way
- in reality, markets often don’t spend much of the time in actual equilibrium
- rather, demand and supply move around a bit, creating temporary shortages and surpluses to which the market constantly adjusts
some markets are more “fluid”, which means disequilibrium is rare and only very transitory, so the market clears all the time e.g. stock-markets
some markets are much more “sticky”, and may spend a long time in disequilibrium before buyers and seller have time to adjust e.g. the housing market
