Market Forces: Demand and Supply Flashcards
Market Demand Curve Definition
Law of Demand definition
Graph
Definition:
- Illustrates the relationship between the total quantity and price per unit of a good all consumers are willing and able to purchase, holding other variables constant.
Law of Demand:
- The quantity of a good consumers are willing and able to purchase increases as the price falls and decreases as the price rises.
Changes in Quantity Demanded vs. Changes in Demand Definitions
Graph
Changes in Quantity Demanded:
- Changes due to price changes, represented by movement along the demand curve.
Changes in Demand:
- Changes due to factors other than price, represented by a shift of the entire demand curve.
Demand Shifters
(5/2,2,2,1,1)
Income:
Normal Good:
- Demand increases as consumer income increases.
Inferior Good:
- Demand decreases as consumer income increases.
Prices of Related Goods:
Substitute Goods:
- Demand increases as the price of a substitute rises.
Complement Goods:
- Demand decreases as the price of a complement rises.
Advertising and Consumer Tastes:
Informative Advertising:
- Provides information about a product, increasing demand.
Persuasive Advertising:
- Alters consumer tastes, increasing demand.
Population:
- More consumers increase demand.
Consumer Expectations:
- Expectations of future prices or income can affect current demand.
Advertising and the Demand for high-style Clothing graph
The Demand Function
The demand function for good X is a mathematical representation describing how ________ _____ will be _____________ at _____________ _______ for good X, ______________ _________ of a __________ good Y, different levels of __________, and other factors that affect the demand for good X.
The demand function for good X is a mathematical representation describing how many units will be purchased at different prices for good X, different prices of a related good Y, different levels of income, and other factors that affect the demand for good X.
The Linear Demand Function
Formula and what everything stands for
Understanding the Linear Demand Function
Formula and the different factors
Suppose that an economic consultant for X Corp. recently provided the firm’s marketing manager with this estimate of the demand function for the firm’s product:
〖𝑄_𝑋〗^𝑑=12,000−3𝑃_𝑋+4𝑃_𝑌−1𝑀+2𝐴_𝑋
Question: How many of good X will consumers purchase when 𝑃_𝑋=£200 per unit, 𝑃_𝑌=£15 per unit, 𝑀=£10,000 and 𝐴_𝑋=£2,000? Are goods X and Y substitutes or complements? Is good X a normal or an inferior good?
Answer:
〖𝑄_𝑋^𝑑=
12,000−3(200)+4(15)−1(10,000)+2(2000)=5,460 units. Goods X and Y are substitutes. Good X is an inferior good.
Inverse Demand Function
By setting 𝑃_𝑌=£15 and 𝑀=£10,000 and 𝐴=£2,000 the demand function is
〖𝑄_𝑋〗^𝑑= 12,000−3𝑃_𝑋+4(15)−1(10,000)+2(2,000)
The Inverse Demand Function or Demand Schedule
Graph
Consumer Surplus
Marketing strategies – like _______ __________ and _______ _____________ – rely on understanding ___________ _______ for products.
Total consumer value definition?
Total expenditure definition?
Consumer surplus definition?
How to calculate?
Marketing strategies – like value pricing and price discrimination – rely on understanding consumer value for products.
Total consumer value definition
- the sum of the maximum amount a consumer is willing to pay at different quantities.
Total expenditure
- the per-unit market price times the number of units consumed.
Consumer Surplus Definition:
- The extra value that consumers derive from a good but do not pay for.
Calculation:
- The difference between what consumers are willing to pay and what they actually pay.
Market Demand and Consumer Surplus in Action
Graph
Market Supply Curve
Definition?
What is the law of supply?
Definition:
- Summarizes the relationship between the total quantity all producers are willing and able to produce at alternative prices, holding other factors constant.
Law of Supply:
- The quantity supplied of a good rises as the price rises
- and falls as the price falls
Changes in Quantity Supplied vs. Changes in Supply definitions and graph
Changes in Quantity Supplied:
- Changes due to price changes, represented by movement along the supply curve.
Change in Supply:
- Changes due to factors other than price, represented by a shift of the entire supply curve.
Market Equilibrium
Definition?
Characteristic?
Definition:
- The price and quantity at which the market demand and market supply are equal.
Characteristics:
- No shortage or surplus in the market; forces of demand and supply are balanced.
Supply Shifters (7)
Input Prices:
- Higher input prices decrease supply.
Technology:
- Improvements increase supply.
Government Regulation:
- Can either increase or decrease supply.
Number of Firms:
- More firms increase supply.
Substitutes in Production:
- Higher prices of substitutes decrease supply.
Taxes:
- Higher taxes decrease supply.
External Factors:
- Events like war, weather, and natural disasters can affect supply.
The Supply Function
The supply function for good X is a mathematical representation describing how many units will be produced at different _________ for X, different __________ of _______ W, prices of _______________ _________ goods, and other factors that affect the supply for good X.
The supply function for good X is a mathematical representation describing how many units will be produced at different prices for X, different prices of inputs W, prices of technologically related goods, and other factors that affect the supply for good X.
The Linear Supply Function
Formula and what everything stands for
Producer Surplus
Definition?
Importance?
Graph
Definition:
- The amount producers receive in excess of the amount necessary to induce them to produce the good.
Importance:
- Indicates the benefit producers get from selling at a market price higher than their minimum acceptable price.
What determines the price of a good in a competitive market equilibrium?
What ensures a price and quantity in a competitive market equilibrium?
What happens to market forces in a competitive market equilibrium?
Picture of graph
Unfinished
What determines the price of a good in a competitive market equilibrium?
- The price of a good is determined by the interactions between market demand and market supply for that good.
What ensures a price and quantity in a competitive market equilibrium?
- A price and quantity are ensured by the condition that there is no shortage or surplus in the market.
What happens to market forces in a competitive market equilibrium?
- Market demand and market supply forces become balanced, eliminating pressure on prices or quantities to change.
Market Equilibrium example
Solve for P and units
Comparative Statics
Definition?
Useful because?
Definition:
- The study of the movement from one equilibrium to another.
Applications:
- Analyzing the effects of changes in demand, supply, or both on market equilibrium.
Simultaneous Shifts in Supply and Demand
Suppose that simultaneously the following two events occur:
- worldwide demand for automobiles is projected to decrease next year.
- war breaks out in a major oil-producing country in the Middle East.
What is the combined impact on the international crude oil market? (Graph)
Reduced quantity and reduced price
Both curves shift inwards
