demand supply curves chapter 7 Flashcards
price mechanism
the means of allocating resources in a market economy. sends out a signal from consumers to producers. If there is oversupply in a market, consumers are sending a signal to producers that fewer resources should be allocated to a product. In the case of a shortage, the signal from consumers is that more resources need to be allocated to the product. The price mechanism is self-regulating, which means that it does not require any involvement from the government while the mechanism is working efficiently.
consumers
individuals or households who buy goods and services for their own use or for others
market
where buyers and sellers get together to trade
demand
the quantity of a product that consumers are willing and able to buy at different prices per period of time other things equal, ceteris paribus.
supply
the quantity of a product that producers are willing and able to sell at different prices within a time period, other things equal, ceteris paribus.
quantity (demand)
the numerical amount of the product that is being demanded.
product (demand)
general term that is widely used throughout this coursebook. Product refers to the item that is being traded. Product can be used for goods or services. It can also include tradable items like foreign currency or financial assets such as shares.
buyers (demand)
general term that is widely used throughout this coursebook. Product refers to the item that is being traded. Product can be used for goods or services. It can also include tradable items like foreign currency or financial assets such as shares. Economists may consider an individual’s demand for a product or, more usefully, aggregate or sum the demand curves of all individuals to look at demand for the market as a whole.
notional demand (demand)
where buyers may want to buy a product but which is not always backed up b by the the ability to pay.
effective demand (demand)
demand that is supported by the ability to pay.
different prices (demand)
whether the consumer is willing and able to buy it. As the price goes up, and provided no other changes have occurred, more and more people will judge the product to be less worthwhile.
per period of time (demand)
demand must be time related. like per minute or per week
ceteris paribus (demand)
there are many potential influences on the demand for a product. Understanding the connections between the influences is very difficult if many of these elements are changing at the same time. This is why it is necessary to apply the ceteris paribus assumption
demand curve
a line plotted on a graph that represents the relationship between the quantity demanded and the price of a product. shows how quantity demanded responds to a change in price.
market demand
the total amount demanded by consumers.
demand schedule
the data from which a demand curve is drawn on a graph.
features of a demand curve
linear relationship
A continuous relationship
time-based relationship
ceteris paribus
linear demand curve
line representing the relationship between the demand for a product or service and its price
non linear demand curve
suggests that the change in the quantity demanded due to price is not constant throughout the slope of the curve. Hence, in a non linear demand curve the slope varies with changes in quantity and price.
fatctors (determinants) that affect demand
income, the price and availability of related products and fashion, taste and attitudes.
how income affects demand
The ability to pay is vital when considering the importance of effective demand. For any individual, the demand for goods and services depends upon income. there is a positive relationship between income and demand. Goods and services that are characterized by this relationship are called normal goods. there is a negative relationship with inferior goods
normal goods
where the quantity demanded increases as income increases.
inferior goods
where the quantity demanded increases as income decreases.
how does price and availability of related products affect demand
there are two types which are substitutes and complements. substitutes are alternative goods that satisfy the same want or need. the extent of the change in demand depends on the degree of sustainability (how close a substitute is to a product). complements are goods that is consumed with another. a change in price or availability of either one of these products will have an effect on the demand for a complementary good
joint demand
when two goods are consumed together
how does fashion, taste and attitudes affect demand
Fashion, taste and attitudes are more difficult factors to explain since they are largely a matter of individual choice and behavior. As a consumer, you are unique and have your own particular likes and dislikes. For some products, an individual’s attitude might have been built up over time or it could have been influenced
supply
refers to the quantity of a product that suppliers are willing and able to sell at different prices over a period of time, ceteris paribus or other things equal.
Quantity (supply)
the numerical amount of the product is being supplied.
product (supply)
refers to any item that is being traded. Product can apply to goods or services. It can also include tradable items like foreign currency or financial assets such as shares.
suppliers (supply)
the sellers of the product. Suppliers are often referred to as ‘producers’, although they may not always be manufacturers of the product; they might simply be a part of the supply chain or selling services. There may be just one supplier or many suppliers which when aggregated make up the market supply.
willing and able to sell at different prices
in a market economy, companies must gain from selling their products. In many cases, they are in the fortunate position to withhold supply if the price is too low. When price rises in the markets, it is assumed companies will be more willing and able to supply more to the market. This gives a positive relationship.
per period time
supply must be time related. It is of no use to say that Acer supplied 200 computers unless you specify the relevant time period. Clearly, this needs to be consistent with the time period being used for demand.
ceteris paribus or other things equal
there are many potential influences on the supply of a product. Analysing the connections between the various elements is very difficult if lots of these elements are changing at the same time. So, we assume these other factors affecting supply remain unchanged, ceteris paribus.
supply curve
a line plotted on a graph that represents the relationship between the quantity supplied and the price of the product.
supply schedule
the data from which a supply curve is drawn on a graph.
main features of a supply curve
A causal relationship - price changes cause the change in quantity supplied.
A linear relationship - the supply curve is drawn for simplicity as a straight line. It would be acceptable for the supply curve to be represented in a non-linear way.
A continuous relationship-you could look at the curve to find out how much a product/s would cost
A time-based relationship - the time period here is weekly.
factors affecting suply
cost, the size and nature of industry, government policy or other factors such as nature
costs affecting supply
Supply decisions taken by firms are always driven by the costs of producing and distributing their products to customers.
size and nature of industry affecting supply
If an industry is growing in size, then more products will be supplied to the market. This growth may well attract new entrants; the competition will increase and prices may fall resulting in some firms leaving the industry altogether. In some industries supply could be deliberately restricted to keep up prices.
the change in the price of other products
Most firms need to be continuously aware of competitors. So, if a competitor lowers its price, it could mean that less products will be supplied by other firms who keep their price unchanged. Alternatively, if a competitor increases its price, other firms may gain and will be able to supply more products provided they can keep their costs under control.
government policy
Governments influence companies and their supply of products in many ways. A new tax on a product may result in a reduction in supply: subsidies will usually result in an increase in supply.
what does a shift to the right in the demand curve may mean
an increase in income
an increase in the price of substitutes
a decrease in the price of complements
a favorable change in fashion, taste and attitudes.
what does a shift to the left in demand curve mean
a decrease in income
a decrease in the price of substitutes
an increase in the price of complements
an unfavorable change in fashion, taste and attitudes.
a shift to the right in the supply curve may mean
a decrease in costs of production
growth in the size of the industry
a decrease in the price of competitor’s goods
decrease in an indirect tax or increase in subsidy.
a shift to the left in the supply curve may mean
an increase in costs of production
decline in the size of the industry
an increase in the price of competitor’s goods
increase in an indirect tax or fall in subsidy.
how to distinguish between a shift in the demand or supply curve and a movement along the curves
A movement along a demand or supply curve shows how the quantity demanded or the quantity supplied responds to a change in the price of the product. A shift of a demand or supply curve is in response to a change in any of the non-price determinants of demand or supply. Such shifts are to the right or the left depending on the cause. A shift to the right is an increase in demand or an increase in supply; a shift to the left is a decrease in demand or a decrease in supply.
indirect tax
tax levied on goods and services, such as a general sales tax.
extension of demand and supply
increase in the quantity demanded or quantity supplied.
contraction of demand or supply
decrease in the quantity demanded or quantity supplied.
