intro to supply and demand Flashcards
does the price shift the supply and demand curve?
when the price is below equillibrium, there is a
shortage in demand
when the price is above equillibrium, there is a
surplus in supply
businesses are supply in
and demand in
individuals are supply in
and demand in
supply in the product market
demand in the resource market
individuals are supply in the resource market
demand in the product market
the government
demands in the product and resource market
and supplies public goods and services
what is the law of demand?
there is an inverse relationship between the price and quantity of demanded
e.g. price goes up, qty goes down - vice versa
3 reasons why the line of demand is sloping downwards?
- the substitution effect
- the income effect
- law of dimininshing marginal utility
describe the substitution effect
changes in price motivate consumers to purchase relatively cheaper substitutes
describe the income effect
changes in price affect the purchasing power of consumers’ income
purchasing power increases when the price falls
purchasing power decreases when the price rises
what is the law of diminishing marginal utility?
as a person increases consumption of a product - while keeping consumption of other products constant -_ there is a decline in the marginal utility that person derives from consuming each additional unit of that product._
a change in price will cause a
change in the quantity demanded and supplied
any factor other than price, such as the 5 shifters, can
the new demands are labelled as
cause changes in demand eg. increase or decrease
D1, D2
list the 6 shifters of demand
- tastes/ preferences
- number of consumers
- price of related goods (e.g. substitutes and complements i.e. price of cereal falls, increases demand for milk)
- income
- expectations
- consumers’ information
will change in price affect demand for necessities?
generally no
describe how income will cause shift in demand curve, in regards to normal and inferior goods
normal goods: income and demand for product are directly related (increase in income, increase in demand- vice versa)
inferior goods: income and the demand for produce are inversely related (Increase in income, decrease in demand)
what happens to the demand for a product when the price goes down?
the demand stays the same but the quantity demanded increases
what is the law of supply
there is a direct relationship between the price and quantity supplied
list the 5 shifters of supply
- price of inputs (e.g.increase in labour price)
- number of producers (increased competition –> causing increase in supply –> decrease in price)
- technology
- government taxes & subsidies, regulations
- expectations
- weather conditions
how can expectations shift supply?
if a producer thinks they can make more profit later, they will reduce their supply now
what is the market equillibrium/ market clearing price and qty?
qty supplied = qty demanded
what happens when there is a disequillibrium?
when the price is too high, qty supplied > qty demanded, causing surplus
Or
price is too low, qty demanded > qty supplied causing shortage
what is a price ceiling?
when government imposes a cap on a price of a product, that is the maximum legal price
a price is set below equillibrium, as the government believes the market equilibrium price is too high
in theory, trying to help consumers, in response to consumer compalints by keeping the price low
what is a price floor?
minimum legal price
price set above the equillibrium price, government believes the market equilibrium price is too low
in theory trying to help producers, in response to complaints by producers by keeping the price high
distinguish between normal and inferior good
normal good: a good for which demand increases when income rises and decreases when income falls
i_nferior good:_ a good for which demand decreases when income rises and increases when income falls
supply curve shows
Supply is a relationship between two variables:
(1) the price of a particular good and
(2) the quantity of the good that firms are willing to sell at that price
what are government price controls?
a government law or regulation that sets or limits the price to be charged for a particular good. e.g. price ceiling and floor
what are the effects of price ceilings
- shortage in supply
- reduction in quality of good sold (this allows producer to reduce costs, thereby reducing price)
effect of price floors
- surplus in supply
- divert resources from other productive activities
- in effort to reduce surplus, government will purchase the excess production
- the price floor may not help those who it intended to benefit (e.g. higher price benefits wealthy farms, minimum wage benefiting someone from a wealthy family)
