econ 29th nov (demand and supply chapter 2.3-2.4) Flashcards
What is supply?
the willingness and ability to sell a product
What is demand
The willingness and ability to buy a product
Market supply
total supply of a product
Difference between individual and market demand
Individual demand is the demand of one person for a product.
Market demand is the sum of all the individual demand for a product at every price (total demand for a product)
Extension in supply
a rise in the quantity supplied caused by a rise in the price of the product itself
Law of demand
The relationship between price and quantity demanded is inversely proportional. As the price of a good rises, the quantity demanded will usually fall, ceteris paribus (vice versa: as the prices of a good falls, the quantity of demand will usually rise, all things being equal)
Contraction in supply
a fall in the quantity supplied caused by a fall in the price of the product itself
Changes in supply
changes in supply conditions causing shifts in the supply curve
Increase in supply
a rise in supply at any given price, causing the supply curve to shift to the right
What is the relationship between price & quantity demanded
inverse
Decrease in supply
a fall in supply at any given price, causing the supply curve to shift to the left
what does higher price equal (demand)
lower quantity demanded
Unit cost
the average cost of production, it is found by dividing total cost by output
what does a demand graph look like
price is measured on the vertical axis and quantity demanded on the horizontal
Aggregation
the addition of individual components to arrive at a total amount.
What causes a change in quantity demanded?
A change in the price of the product.
How is a change in quantity demanded represented on a demand curve?
By a movement along the same demand curve.
What happens to the quantity demanded when the price of a product increases?
The quantity demanded decreases.
What happens to the quantity demanded when the price of a product decreases?
The quantity demanded increases.
Does a change in quantity demanded shift the demand curve?
No, it only causes movement along the curve.
When does the entire demand curve shift?
When there is an overall change in demand
What happens during a change in demand?
The entire demand curve shifts due to a factor other than price.
What is the technical term for factors that cause a change in demand?
Non-price determinants of demand.
What are some examples of non-price determinants of demand?
Changes in income
Changes in tastes and preferences
Prices of substitutes or complements
Future price expectations
Changes in population size.
How does an increase in demand appear on a graph?
The demand curve shifts to the right.
How does a decrease in demand appear on a graph?
The demand curve shifts to the left.
What is the key difference between a shift in the demand curve and movement along the curve?
A shift occurs due to non-price factors (change in demand).
Movement along the curve occurs due to a change in price (change in quantity demanded).
What is the contraction in demand (higher up on the curve)
a fall in the quantity demanded caused by a rise in the price of the product itself
What is the extension in demand (lower down the curve)
a rise in the quantity demanded caused by a fall in the price of the product itself
What does change in demand due to a non-price determinant look like on a graph
-Price on the y axis does not change
-The new curve is parallel to the original demand curve.
-Increase in demand: The curve shifts to the right (more is demanded at every price).
Decrease in demand: The curve shifts to the left (less is demanded at every price).
What will the effect on the demand curve depend on for income
the type of good considered: e.g normal goods & inferior goods
relationship between income and demand for normal goods
as income increases, demand increases
relationship between income and demand for inferior goods
as income decreases demand increases
When are normal goods on high demand
when income is high
when are inferior goods on high demand
when income is low
what is the letter that represents income
Y
What two relationships can goods have with eachother? (demand)
substitute and complementary
when goods are related, a change in the _______ of one will result in a change in the _________ of another
price, demand
what are complements
two goods that are typically used or purchased together e.g burgers and fries, or butter and jam
What are substitutes
Two goods that are similar and are in competition
examples: coke and pepsi
what will the increase in price of one substitute good do to the demand of the other good
the demand will increase as consumers would want to purchase the cheaper alternative
e.g if coke raises it prices, demand will increase for pepsi.
relationship between demand and quantity
directly proportional: When demand increases (due to a non-price determinant), the quantity demanded increases at every price point.
relationship between price and demand
inversely proportional
What does change in trends and preferances refer to
When goods become more or less popular because of fashion, current events etc. demand is affected
the demand curve may shift to the right or left depending on the trends
what does number of consumers refer to
It refers to the total number of people in a market who are willing and able to buy a product.
An increase in consumers typically shifts the demand curve to the right, while a decrease shifts it to the left.
example: During the holiday season, more tourists visit a beach town, increasing demand for hotels and restaurants. Once the season ends, the number of consumers drops, decreasing demand.
What will the decrease in price of a substitute good do to the demand of another good
demand will decrease
e.g- burger king lowers prices so demand will be higher than mcdonalds
If the price of one complementary good decreases
Demand for the other complementary good increases because the two goods are often used together.
If the price of one complementary good increases:
Demand for the other complementary good decreases, as the higher cost of one good discourages consumption of both.
What does future price expectations refer to for ‘future expectations’
if people expect prices of goods and services to increase in the near future, they may decide to purchase more of the goods now.
How will the curve shift is the prices are expected to be low?
It will shift towards the left as demand will be lower in order to buy the product at a cheaper price later on.
what will happen to demand is the future economy is expected to be successful?
demand for goods and services will likely increase and the curve will shift to the right
Supply definition
The quantity of a good or service that producers are willing and able to offer at various prices during a specific time period, ceteris paribus
Individual supply
The individual supply is the supply of one product from one firm at every price.
Market supply
The market supply is the sum of all the individual supplies of a product at every price
Law of supply
There is a DIRECT (or positive) relationship between price and quantity supplied
As the price of a good rises, the quantity supplied will usually rise, ceteris paribus
Higher price: higher supply
What is the line in the graph for supply like
y=x, like positive
What is the line in the graph for demand like
y= -x like negative
contraction on a demand graph
the point moves up the curve (quantity demanded decreases) inverse relation
contraction on a supply graph
the point moves down the curve (quantity supplied decreases)
extension on a demand graph
moves down the curve: a rise in quantity demanded
extension on a supply graph
moves up the curve: quantity supplied increases
Change in quantity supplied
caused by a change in price of a product, simply moves along the supply curve.
Change in supply
caused by a non-price determinant: the entire supply curve shifts (price stays the same)
What does a rightward / leftward shift (increase& decrease in supply) indicate
more is supplied for the same price/ less is for the same price
what are the non price determinants for supply
Costs of production
Technology
Prices of related goods
Number of producers
Government policies (taxes and subsidies)
Expectations of future prices
sudden unexpected events
Whats an example of cost of production affecting supply
An increase in the price of flour or wheat will likely decrease the supply of pizza, causing a shift of supply to the left.
If a factor price falls, cost of production falls, production becomes more profitable and the firm produces more vice versa.
What does improvements in a firm or industry’s technology do
it increases the supply of a good or service by increasing productivity (quantity of output per unit of input)
Supply increases and shifts to the right
Example of improvement in technology
The implementation of a tractor drastically increases the productivity on farms, thus making production more profitable
what is market supply
the sum of all the individual supplies of a product
How does the number of firms or sellers impact supply?
more firms entering the market increase the total supply (rightward shift), while fewer firms reduce supply (leftward shift).
This is due to changes in the aggregate production capacity.
What happens to supply when firms expect prices of their products to increase in the near future
they might withhold part of their current production from the market (not offering it for sale and storing it) in the hopes of selling at higher price
This leads to fall in supply and a leftward shift
What happens to supply when the expectation is that prices of their product will fall
supply increases in the present to take advantage of the current higher prices.
rightward shift
What is joint supply (price of related goods)
When two or more goods are derived from the same product so that it is not possible to produce more of one without producing more of the other.
what is competitive supply
when the production of two goods uses similar resources and processes. When a supplier produces more of one good it means producing less of the other.
What happens to the joint supply good when the price of the other good supplied increases
an increase in the price of one leads to an increase in the other, leading to an increase in supply.
whats an example of competitive supply
If the price of snowboards increases, a ski making firm may switch to snowboard production as its more profitable
in competitive supply, the ________ in price of product a leads to the decrease in __________ of b
increase, supply
in joint supply the _________ in price of product a leads to the ________ in _______of product b
increase, increase
What is government tax (supply) and what effect does it have
Taxes are costs that firms have to pay.
A rise in the rate of an existing tax or the imposition of a new tax will make it more expensive to supply a product and hence reduce supply.
A cut in tax will increase supply.
What is a subsidy and what effect does it have on supply.
A subsidy is a financial assistance provided by the government to reduce the production costs for firms.
It increases supply by making production more profitable, causing the supply curve to shift rightward.
This encourages firms to produce more at every price level.
Examples of supply shocks (analyse how supply moves on the graph and what happens to it)
Natural Disasters (e.g., hurricanes, droughts)
These destroy resources or production facilities, causing a negative supply shock.
The supply curve shifts leftward as firms can produce less at every price.
This leads to higher equilibrium prices and lower quantities supplied.
example of joint supply (analyse what happens to supply of one)
An example of joint supply is wool and lamb, both derived from sheep.
If the price of wool increases, farmers will raise more sheep to sell wool, increasing the supply of lamb as a by-product.
the price of a product increases, what will happen to the demand for its complement
When the price of a product increases, the demand for its complement decreases (shifts to the left)
explain the relationship between demand and change in price
Inverse Relationship
explain why supply and price are positively related
Profit Incentive:
Higher prices make it more profitable for producers to produce and sell the good.
As a result, firms are willing to supply more to maximize their profits.
Higher prices can attract new firms into the market or encourage existing firms to allocate more resources to producing that good, increasing total supply.
