Demand, supply & Equilibrium Flashcards
How do markets work?
Buyers and sellers come together to determine price/quantity. Markets characterised by single price. Price influences demand and supply.
Describe the law of demand
Lower the price, the larger the quantity supplied.
What is quantity demanded?
Not physically the amount demanded, but the amount a household wishes to buy.
Describe changes in demand
Quantity demanded will change with price.
What causes changes in demand?
Tastes, preferences, price, number of substitutes, price of complementary goods, income, expectations, demographics.
What impacts demand?
A fall in house prices, an increase in household income, a fall in retail values, a rise in mortgage costs.
Describe the law of supply
Quantity of any commodity produced/ supplied will be related to price.
What other determinants shift the supply curve?
Costs of production, profitability of substitutes and goods in joint supply, expectations.
What does elasticity measure?
The responsiveness of supply and demand to changes in factors that affect them (price, income).
What is price elasticity of demand?
The responsiveness of demand to a change in price.
What is price elasticity of supply? (PES)
Is determined by the existence of stocks, capacity of industry.
Why is PES of housing very low?
Planning regulations, high construction costs, shortages of skilled workers, housebuilders strategies.
Argument planning doesn’t let prices change - if it did builders may be able to build more - therefore should be less restrictive = increase in supply.
What are planning and price signals?
Markets allocate through resources - demand and supply. Prices reflect consumer preferences and producer profit requirements. Planners are insufficiently market aware.
What happens to the demand curve when demand is inelastic?
Changes in equilibrium price but little change in quantity.
What happens when demand is elastic?
Little change in price but big changes in quantity supplied.
