Demand, supply and prices Flashcards
Economist’s definition of demand:
Quantities of a good or service that potential buyers are willing and able to purchase during a certain period.
Willing to purchase:
Refers to the condition that you are willing to pay.
Main aspects of economist’s definition of demand:
Differs from needs to wants.
Indicates willingness to purchase.
Indicates ability to purchase.
It is for a specified period.
Factors that determine the demand for goods:
Tastes and preferences (T). Income (Y). Price of the product (Px). Number of potential buyers (N). Price of related goods (Pg). Substitutes. Complements. Other factors - weather and expected prices.
Demand equation:
Qd = f (T, Y, Px, N, Pg,….)
Law of demand:
Higher the price the lower the quantity demanded, lower the price the higher the quantity demanded.
Non-price factors of demand:
Any factor other than the price of the good or service that influences the demand for it. Change in non-price factors can increase or decrease the demand.
Non-price factors of demand include:
Tastes and preferences (T). Income (Y). Number of potential buyers (N). Price of related goods (Pg) - substitutes and complements. The weather. Expected price. Income distribution.
Change in income:
Income increases consumers normally buy more of a good, if income decreases, consumers buy less of a good.
Increase in income leading to increase in demand:
The good in this scenrio is referred to as a normal good.
Increase in income leading to decrease in demand:
The good in this scenario is referred to as a inferior good.
Change in quantity demanded:
Price of a good decreases quantity demanded will increase ceteris paribus. Price of a good increases the quantity demanded decreases ceteris paribus.
Changes in demand:
Change in non-price factors causes a change in the quantity demanded at each price.
Change in price:
Causes change in quantity demanded respresented as a movement along the demand curve.
Changes in non-price factors:
Causes a change in demand and is represented as a shift of the demand curve.
Substitutes:
Good that can be used in the place of another good without reducing a consumer level of satisfaction.
Complements:
Goods that are often used jointly.
Change in price of substitutes:
Price decreases demand for the other good usually decreases.
Change in price of complements:
Decrease in demand increases the quantity demanded of it as well as the complement thereof. Same can be said in reverse.
Meaning of supply:
Quantities of a good or service that potential suppliers are willing and able to supply during a certain period.
Factors that influence supply:
Price of a good (Px). Price of inputs (Pc). Price of alternative goods (Pg). Technology needed (T). Number of suppliers (N). Weather. Expected prices.
Supply as an equation:
Qs = f(Px, Pc, T, Pg, N,….)
Law of supply:
Higher the price of the good the higher the quantity supplied will be, lower the price of the good the lower the quantity supplied will be.
Non-price factors of supply:
Price of inputs (cost of production). Price of alternative goods. Technology needed. Expected prices. Number of suppliers.