external influences - supply and demand Flashcards
define demand
the amount of a good/service that customers are willing and able to buy at any given price
define supply
the amount of a good/service that sellers are willing and able to sell at any given price
what is the relationship between price and demand?
inverse relationship
as price goes up, demand goes down
what is the relationship between supply and price?
direct relationship
as supply goes up, price also goes up
define equilibrium price
the situation in a market where demand is equal to supply i.e. both parties are happy. in theory, customers can buy what they want and shops have no unsold stock
as demand increases what happens to price and quantity?
price: increases
quantity: increases
as supply increases what happens to price and quantity?
price: decreases
quantity: increases
what does the equilibrium graph look like?
price on y axis
quantity on x axis
demand line goes down
supply line goes up
equilibrium is where they cross
as demand increases what happens to price?
increases
as demand increases what happens to quantity?
increases because demand is higher so suppliers will supply more to sellers
as supply increases what happens to quantity?
increases because there’s more supply
what are the factors of demand?
- price
- income
- Wealth
- Advertising, promotional offers and public relations
- Tastes and fashions
- Demographic changes (i.e. Population)
- Government action
- The price of other products:
Substitutes
Complements
How is supply affected when price goes up?
supply increases
what happens to the supply curve when price goes up and therefore supply too
there is movement up the curve
how is supply affected if price goes down?
supply decreases
what happens to the supply curve when price decreases and therefore supply too?
there is movement down the curve
when cost decreases what happens to supply?
increases
there is an inverse relationship between supply and cost
define cost?
the amount spent by a business making/supplying/buying the product
define price?
the amount customers pay for a product
how does price affect demand?
as price decreases, quantity increases
it is an inverse relationship
how does income affect demand?
as income increases, demand increases
it is a direct relationship
how does wealth affect demand?
when wealth increases, demand will also increase because people feel that they have more to spend
how does an increase in wealth affect the demand curve?
shift to the right
how does taste and fashion affect demand?
demand will increase as people want to be ‘in trend’
how does trend and fashion affect the demand curve?
shift to the right
how does advertising, promotional offers and public relations affect demand?
demand will increase as more people hear about the product/service and therefore want to buy it
how does adverts, offers and public relations affect the demand curve?
shift to the right
how do demographic changes affect demand?
demand will increase as more people require the products
how is the demand curve affected when demographic changes?
shift to the right
how does the price of other products - substitutes affect demand?
increase demand for the substitute as the main product might be too expensive or not available
how does the demand curve change with substitutes?
supply curve doesn’t change for the increased price product (other than the price line rising), the curve will shift to the right of the substitute
how do the price of other products - complements affect demand?
demand is increased for the complement as the price of the main product falls (as they can afford the complement)
how do complements affect the demand curve?
price of one product will decrease, moving the dotted price line down, and the supply curve for the other will shift to the right because the price stays the same, but more are bought
how does government action affect demand?
demand will increase, but sometimes it may cause demand to decrease (increase in healthy foods in keep fit campaign, but decrease in cigarette sales)
how does government action affect the supply curve?
shift to the right if there is in increase in demand
shift to the left if there is a decrease in demand
define tax
compulsory charges on individuals and organisations by the government
as tax increases what happens to supply?
supply will decrease as the cost of the product becomes too expensive for the seller to purchase
what are subsidies?
aka grants
payment from the government to businesses or individuals
if a business is paid a subsidy what happens to supply?
supply will increase (usually a subsidy is given to a business in order to use for something specific e.g. solar panels)
what are the 5 factors that affect supply?
cost, price, tax, subsidies, price of other products
what are some types of taxes?
council
road
income
sugar
alcohol
sugar
inheritance
stamp duty
cigarette
corporation
how does tax affect supply?
Supply decreases as tax increases. It is an inverse relationship
how do subsidies (grants) affect supply?
Supply will increase as grants increases (because the government is paying money for the business to add something e.g., car charging points)
how do price of other products (substitutes and complements) affect supply?
A fall in the price of one means supply will decreases. Meaning, the price of another stays the same but its supply will increase as the business buys more of it because it is more profitable to sell.
How is excess shown on a graph?
draw an equilibrium graph, then if there is an increase in price draw a new dotted line above P. This line goes all the way to the end of the demand line. Then draw two dotted lines down from where the dotted line crosses the S and D lines. The triangle above is excess. Shade this in.
How is shortage shown on a graph?
draw an equilibrium graph, then if there is a decrease in price draw a new dotted line below P. This line goes all the way to the end of the demand line. Then draw two dotted lines down from where the dotted line crosses the S and D lines. The triangle below is shortage. Shade this in.
How can a business come out of excess?
if they lower the price of the product then more people will buy it, so the excess decreases.
How can a business come out of a shortage?
increase the price of the product, then not as many people will buy it so the demand for it will decrease.
