L3 - Supply and Demand

Question 1

What is Demand?

Answer 1

How much buyers want to purchase of a good or service

Quantity demanded is:
Amount consumers to buy at a given price

Question 2

What is Supply?

Answer 2

How much sellers are willing to produce of a good or service

Quantity Supplied is Amount of product firms wish to supply at given price

Question 3

What are the assumptions behind Supply/Demand?

Answer 3

Agents:

• Many buyers
• Many Sellers
• No Govt intervention

Firms:
Sell one product
Maximise individual profit (R-TC)
Price Takers

PROFIT= PxQ - TC

Consumers:
Maximise individual satisfaction
Utility determines max willingness to pay

Question 4

What is the Law of Demand?

Answer 4

When the price of a good rises, the quantity demanded will fall.

Curve slopes downwards to represent this.

Question 5

What causes a shift in demand?

Answer 5

Change in price of related goods:
Substitutes: D to right when P of substitute increase
DEPEND ON IF: SUBSTITUTE GIVE SAME UTILITY

Compliments:
• D to the left when P of compliment rises
Change in taste:
• Affected by adverts
• D to right if find product more desirable

Change in total income:
• D shift to right when income goes up.

• DEPENDS ON NORMAL GOODS,INFERIOR GOODS,SUPERIOR GOODS. INCOME EFFECT CAN BE SEEN HERE

Change in No. of Buyers:
• D to the right if No. of buyers goes up

Change in expectations of future, individual characteristics and environmental factors:
- consumers expectations of the future: future income, future prices and future supply
• their individual characteristics: e.g., decreasing number of children per family, increasing number of retired people etc.
• environmental factors: e.g., weather forecasts

Question 6

What is the Law of Supply?

Answer 6

When price goes up so does supply.
(REPRESENTED IN UPWARD SLOPE)

• Scale effect: a firm’s costs rise as it produces more, i.e. their production methods are less productive than before
• Entry effect: high cost firms enter the market because they can make a profit due to the higher price

Question 7

What are the causes of a shift in Supply?

Answer 7

Change in input prices:
Supply is likely to shift to the left when the prices of inputs rise
• the minimum price sellers willing to accept increases
Changes in technology:
Supply is likely to shift to the right when there is technological advancement
• more can be produced using fewer resources
Change in number of sellers:
Supply is likely to shift to the right when there are more sellers
• more is produced at any given price
Random shocks:
Supply is likely to shift to the left when there is an unpredictable shortage
• at a given price, sellers can supply less than before