Demand, Supply & The Market Flashcards
What is demand?
The quantity that buyers wish to buy at each price
Why is the demand curve sloping downwards?
Because the relationship with the price and quantity demanded is negatively related
Price low -> Quantity demanded high
Price high -> Quantity demanded low
What is the difference between demand and inverse demand?
The price of good x affects the quantity demanded for good x (price rises, consume less, price falls, consume more)
Mathematically, relationship between price of good x and x: X = A - P(x), where A: arbitrary constant, P(x): price of good x, cause, X: quantity demanded for x, resultant
Demand equation
X = A - P(x)
Inverse demand equation
P(x) = A - X
where
A: arbitrary constant
x: quantity demanded, cause
P(x): price of x, resultant
What factors may cause the demand curve to shift parallel to the right/left?
Changes in:
1. Taste & preference of consumers
2. Price of other goods (depending on if they are gross substitutes or complements)
3. Consumers’ income
Parallel used to emphasize only the factors above may cause demand to shift, BUT shift of demand unaffected by price of good x itself
What causes movement along the demand curve?
If price of good x changes -> changes in quantity demanded of good x
What is a perfect substitute?
Goods that are equally the same
e.g. water in a cup and water in bottle, can’t tell the difference as water is colourless and tastes the same
What is a gross substitute?
Goods that are completely different
e.g. coffee and tea, colour and taste are different
What are complements?
Goods that are consumed together
e.g. bread with jam, coffee with sugar/creamer
What is supply?
The quantity of a good that sellers wish to sell at each price
Why does the supply curve slope upwards?
Because the relationship of price and supply are postively related, meaning assuming other things equal, the higher the price, the higher the quantity supplied because suppliers want to maximise profit
What causes the supply curve to shift?
Changes in:
1. Technology -> furthers/stagnates production relative to supplier’s competitor(s)
2. Number of producers -> the more producers, the more supply and vice versa
3. Price of input factors (raw materials)
4. Weather (in the context of agricultural goods) e.g. rice
Effect of increase in demand on the demand curve
Factor induces increase in demand -> shifts demand curve to the right -> increases equilibrium price and equilibrium quantity
Effect of decrease in demand on the demand curve
Downward shift of demand curve -> reduces equilibrium price and equilibrium quantity
Effect of increase in supply on the supply curve
Factor increases supply -> supply curve shifts to the right -> increases equilibrium quantity -> reduces equilibrium price
Effect of decrease in supply on the supply curve
Leftward shift -> reduces equilbrium quantity -> increases equilibrium price
What is a market equilibrium?
When the market price equates the quantity supplied and the quantity demanded, the supply and demand curves intersect
Excess demand in the market
Shortage, price is below the equilibrium price, tends to raise the price to get back up to the equilibrium
Excess supply in the market
Surplus, price is above the equilibrium price, tends to reduce the price to head down to the equilibrium
Economic surplus
The sum of consumer and producer surplus
Consumer surplus
Measured by: area below market demand and above equilibrium price
Producer surplus
Measured by: area above market supply and below equilibrium price
Price ceiling
When the price is imposed BELOW the free market equilibrium price
Reduces quantity supplied -> leads to excess demand unless government provides extra quantity required
Price floor
When the price is imposed ABOVE the free market equilibrium price
Reduces quantity demanded -> leads to excess supply unless government adds its own demand to the private sector
