Market forces of supply and demand Flashcards
Define market
Group of buyers and sellers in a particular (be specific) good or service
Define competitive market
Involves many buyers and sellers
What sort of impact does a competitive market have?
Negligible impact- not a monopoly
What do supply and demand determine?
Prices in a market economy and in turn how the scarce resources are allocated
What is a monopoly?
This is where a single buyer or seller has the power to control the market
What is the demand relationship?
This is the relationship between own price and quantity demanded when all other things are equal.
What is the law of demand?
The claim that, all other things equal, the quantity demanded of a good falls when the price rises.
What type of good is the law of demand not the case for?
Giffen goods
What do the demand schedule table and the demand curve graph show?
The relationship between price and quantity
What does market demand refer to?
The sum of all individual demands for a particular good or service
What is always on the vertical line of the demand curve?
Price
What is always on the horizontal line of the demand curve?
Quantity demanded
In which direction does the demand curve typically slope?
Downwards
How is the market demand curve obtained graphically?
Individual demand curves are summed horizontally.
What will a tax that raises the price of a good do to the demand curve?
It will result in a movement along the curve
What does change in demand refer to?
Any change other than own price that alters the quantity demanded at every price
List 6 factors that could cause a change in demand
Price of related goods Income Tastes Number of buyers Advertising Expectations
What are the two types of related goods that could affect the demand?
Substitutes
Complements
How does the demand for the substitute change if the price increases?
If the price of the product increases, the demand for the substitute increases.
Give 3 examples of complements for a phone
Apple Care
Phone case
Insurance
What would happen if the price of the leading good increased?
The demand for both the leading product and for the complements would decrease.
What are the two types of good that a change in income can affect?
Normal and inferior goods
How will a higher income affect demand?
A higher income means that the higher end product can be bought so normal goods are bought rather than inferior ones
How does the demand for normal goods change?
It changes in the same direction as income change
How does the demand for inferior goods change?
It changes in the opposite direction as income.
Define inferior good
A good for which, all things equal, an increase in income leads to a decrease in demand
Define normal good
A good for which, all things equal, an increase in income leads to an increase in demand.
In what direction does the demand curve shift if there is an increase in demand?
It shifts to the right and the price increases
In what direction does the demand curve shift if there is a decrease in demand?
It shifts to the left and the price decreases
In what direction does the demand curve for a normal good change if the income increases?
It shifts to the right and the price and demand for the good increases.
In what direction does the demand curve for an inferior good change if the income increases?
It shifts to the left and demand for the good decreases.
What is the supply relationship?
This is the relationship between own price and quantity supplied, all things equal.
What is the law of supply?
All other things equal, the quantity supplied of a good increases when the price of the good rises.
In what direction is the supply curve if the law of supply is being followed?
It is upward sloping
What does market supply refer to?
The sum of all individual supplies for all sellers of a particular good or service.
How is the market supply curve obtained graphically?
Individual supply curves are summed horizontally
What does a change in supply refer to?
A change in a determinant other than own price
What are 6 things that can cause a change in supply?
Profitability of other goods in production and prices of goods in joint supply
Technology
Natural/ social factors
Input prices
Expectations of producers about the future state of the market
A change in the number of sellers in the market
Give two examples of natural and social factors
Weather
Changing attitudes
What are input prices?
These are the prices of the factors of production
What happens to the supply curve if there is a decrease in supply?
It shifts to the left and the price increases
What happens to the supply curve if there is an increase in supply?
It shifts to the right and the price decreases.
What is meant by equilibrium price?
This is the price that balances quantity supplied and quantity demanded
How can you find the equilibrium price graphically?
It is the price at which the supply and demand curve intersect.
What is meant by equilibrium quantity?
The quantity supplied and the quantity demanded at the equilibrium price.
How can you find the equilibrium quantity graphically?
It is the quantity at which the supply and demand curves intersect
Where can the surplus be found on a graph?
In the region above where the demand and supply curves intersect up until the line
Where can the shortage be found on a graph?
In the region below where the demand and supply curves intersect up until the line
What is the main function of price in a free market?
To act as a signal to both buyers an sellers
What does the price tell buyers?
What needs to be given up (usually money) in order to aquire benefits
What does the price tell sellers?
It is a signal in relation to the profitability of production
What is the law of supply and demand?
The claim that the price of any good adjusts to bring the quantity demanded for that good into balance.
