ECON 2.1+2.2: Demand and Supply Flashcards
What is the law of demand?
There is a negative relationship between price and quantity demanded (negative slope of demand curve). When price increases, quantity demanded decreases, ceteris paribus.
What is ceteris paribus?
Principle where all conditions except the one studied are assumed to stay constant.
How do the factors of demand increase demand?
Increase in the income of consumers (if normal good) | Decrease in price of a complementary good | Increase in price of substitute good | Increase in population size | Shift in taste towards good in question
What is a complementary good?
A good that is consumed along with another good.
What is a substitute good?
A good that is consumed instead of another good.
What is a normal good?
A good for which demand increases when income increases.
What is an inferior good?
A good for which demand decreases when income increases.
What is the law of supply?
A positive relationship exists between price and quantity supplied (positive slope of supply curve). When price increases, quantity supplied increases, ceteris paribus.
How do the factors of demand decrease demand?
Decrease in the income of consumers (if normal good) | Increase in price of a complementary good | Decrease in price of substitute good | Decrease in population size | Shift in taste away from good in question
How do the factors of supply increase supply?
Decrease in the cost of factors of production | Advancement of technology | Increase in the prices of related competitive/substitute goods | Decrease in the price of related complementary goods | Decrease in indirect taxes | Increase in subsidies | Decrease in the number of firms/competitors in the market | Expectation of a market boom
How do the factors of supply decrease supply?
Increase in the cost of factors of production | Deterioration of technology | Decrease in the prices of related competitive goods | Increase in the price of related goods | Increase in indirect taxes | Decrease in subsidies | Increase in the number of firms/competitors in the market | Expectation of a market bust
What happens when quantity demanded exceeds quantity supplied?
Excess demand - shortage.
What happens when quantity supplied exceeds quantity demanded?
Excess supply - surplus.
What is the signalling function of price?
A high price is a signal to producers that consumers want to buy the good.*
What is the incentive function of price?
A higher price is an incentive for producers to produce more to increase profit, while it is an incentive for consumers not to buy the good.*
