L3 - Supply and Demand Flashcards
What is Demand?
Demand is how much buyers want to purchase of a good or service at a given price
What is Supply?
Supply is how much sellers are willing to produce of a good or service at given price
What are Agents?
any who makers decision relevant to our theory
Who are the agents in the basic model?
- Many buyers (consumers)
- Many sellers (firms, producers)
- No government
What are Product markets?
- The marketplace in which a final good or service is bought and sold. A product market does not include trading in raw or other intermediate materials, and instead focuses on finished goods purchased by consumers, businesses, the public sector and foreign buyers.
- Buyers = individuals & sellers = firms
What are Factor markets?
- A factor market is the place where companies buy what they need to produce their goods and services. This market is also referred to as the input market
- Buyers = firms & sellers = individuals
What are the Assumption of the Firms in the Basic Model?
- Sell one product
- Maximize their individual profit (Revenue minus total costs)
- Profit = price x quantity – total costs (corrected)
- Cannot influence the price, i.e. they are price takers
What are the assumption of the Consumers in the Basic Model?
- Maximize their individual satisfaction, i.e. their utilities
- Utility determines the maximum willingness to pay
- Consumers buy the product if the price is below there maximum willingness to pay
What does Ceteris Paribus stand for?
- other things being equal
- in the theory of supply and demand everything stays the same but the price variable
What is the nature of demand?
The amount of a product that consumers wish to purchase at a
given price is: the quantity demanded
- This is not the amount that is actually purchased: it’s the desired amount
- The quantity demanded is expressed in terms of a time period
What is the Law of Demand?
When the price of a good rises, the quantity demanded will fall
- Income effect: people feel poorer
- Substitution effect: people change their behaviour and buy similar or rival goods/ services
How can the demand curve by interpreted?
The demand curve shows the relationship between the quantity of a good
demanded and it’s price, ceteris paribus (all other things remain equal)
Horizontal interpretation:
- Starting from any price, the demand curve shows what the quantity
demanded will be
Vertical interpretation:
- Start with any given quantity: the demand curve shows the maximum price
that a buyer is willing to pay for this unit of the product
What can cause a shift in demand?
- Change in prices of related goods
- Change in total income
- Change in taste
- Change in number of buyers
- Changes in expectations of the future, individual characteristics,
environmental factors
How does changes in price of related good cause a shift in Demand?
Substitutes:
- demand shifts to the right when the price of a substitute increases
- demand increases: people will switch away from the more expensive
alternative
Complements:
- demand shifts to the left when the price of a complement increases
- demand decreases: people stop purchasing the complement
How can Changes in total income cause a shift in Demand?
Demand is likely to shift to the right when income rises
- the more affluent people are, the more they are willing to pay to have stuff
Normal goods
- An increase in income shifts the demand curve to the right
- More is consumed at each possible price
Inferior goods
- An increase in income shifts the demand curve to the left
- Less is consumed at each possible price