Markets, demand & supply Flashcards
Law of demand
The quantity of good demanded per period of time will fall as price rises and will rise as price falls, other things being equal
Income effect
The effect of a change in price on quantity demanded arising from the consumer becoming better or worse off as a result of the price change
Substitution effect
The effect of a change in price on quantity demanded arising from the consumer switching to or from alternative (substitute) products
Quantity demanded
The amount of a good that a consumer is willing and able to buy at a given price over a given period of time
Demand schedule for an individual
A table showing the different quantities of a good that a person is willing and able to buy at a given price over a given period of time
Market demand schedule for an individual
A table showing the different quantities of a good that consumers are willing and able to buy at various prices over a given period of time
Demand curve
A graph showing the relationship between the price of a good and the quantity of the good demanded over a given time period. Price is measured on the vertical axis. Quantity demanded is measured on the horizontal axis. A demand curve can be for an individual consumer or a group of consumers, or more usually for the whole market.
Substitute goods
A pair of goods that are considered by consumers to be alternatives to each other. As the price of one goes up, the demand for the other rises.
Complementary goods
A pair of goods consumed together. As the price of one goes up, the demand of both goods will fall
Normal good
A good whose demand rises as people’s incomes rise
Inferior good
A good whose demand falls as people’s incomes rise
Ceteris paribus
Latin for ‘other things being equal’. This assumption has to be made when making deductions from theories
Change in demand
The term used for a shift in the demand curve. It occurs when a determinant of demand other than price changes
Change in the quantity demanded
The term used for a movement along the demand curve to a new point. It occurs when there is a change in price
Principle of diminishing marginal utility
As more units of a good are consumed, additional units will provide less additional satisfaction than previous units
Marginal utility (MU)
The extra satisfaction gained from consuming one extra unit of a good within a given time period
Rational consumer behavior
The attempt to get as much value as possible from your money when purchasing a good. If MU>P, you will buy more; if MU<P, you will buy less (or not buy at all); if MU=P, you will maintain your level of consumption
Consumer surplus
The excess of what a person would have been prepared to pay for a good (i.e. the utility) over what that person acctually pays
Marginal customer surplus
The excess of utility from the consumption of one more unit of a good (MU) over the price paid: MCS= MU - P
Total consumer surplus
The excess of a person’s total utility from the consumption of a good (TU) over the total amount that person spends on it (TE): TCS = TU - TE
Rational consumer behaviour (alternative definition)
The attempt to maximise total consumer surplus
Supply schedule
A table showing the different quantities of a good that producers are willing and able to supply at various prices over a given time period. A supply schedule can be for an individual producer or group of producers, or for all producers (the market supply schedule)
Supply curve
A graph showing the relationship between the price of a good and the quantity of the good supplied over a specified period of time
Substitutes in supply
These are two goods where an increased production of one means diverting resources away from producing the other
Goods in joint supply
These are two goods where the production of more of one leads to the production of more of the other
Change in the quantity supplied
The term used for a movement along the supply curve to a new point. It occurs when there is a change in price
Change in supply
The term used for a shift in the supply curve. It occurs when a determinant other than price changes
Market cleaning
A market cleans when supply matches demand, leaving no shortage or surplus
Bounded rationality
When the ability to make rational decisions is limited by lack of information or the time necessary to obtain such information
Heuristics
People’s use of strategies that draw on simple lessons from past experience when they are faced with similar, although not identical, choices
when the price of a good rises the quantity demanded per period of time will…
fall. This is known as the “law of demand”. It applies both to individuals’ demand and to the whole market demand
The law of demand is explained by
the income and substitution effects of a price change
The relationship between price and quantity demanded per period of time can be shown…
in a table(or “schedual”) or as a graph. On the graph, price is plotted on the vertical axis and quantity demanded per period of time on the horizontal axis. The resulting demand curve is downward sloping(negatively sloped)
Other determinants of demand include…
tastes, the number and substitute goods, the number and price of complementary goods, income, the distribution of income and expectations of future price changes
If price changes
the effect is shown by a movement along the demand curve. We call this effect ”a change in the quantity demanded”
if any other determinant of demand changes
the whole curve will shift. We call this effect “a change in demand”. A rightward shift represents an increase in demand; a leftward shift represents a decrease in demand
consumers will attempt to get the best value from
their money when buying goods. They will do this by consuming more of a good as long as its marginal utility to them (measured in terms of the price they are prepared to pay for it) exceeds its price. But as they buy more, marginal utility will diminish. They will stop buying additional amounts once MU has fallen to equal the price.
An individual’s demand curve lies
along the same line as the individual’s marginal utility curve. The market demand curve is the sum of all individuals’ marginal utility curves.
When the price of a good rises the quantity supplied per period of time will usually…
also rise. This applies both to individual producers’ supply and to the whole market supply.
There are two reasons in the short run why a higher price encourages producers to supply more:
(a) they are now willing to incur higher costs per unit associated with producing more; (b) they will switch to producing this product instead of now less profitable ones. In the long run there is a third reason: new producers will be attracted into the market.
The relationship between price and quantity supplied per period of time can be shown in
a table (or schedule) or as a graph. As with a demand curve, price is plotted on the vertical axis and quantity per period of time on the horizontal axis. The resulting supply curve is upward sloping (positively sloped).
Other determinants of supply include the costs of
production, the profitability of alternative products, the profitability of goods in joint supply, random shocks and expectations of future price changes.
If price changes,
the effect is shown by a movement along the supply curve. We call this effect ‘a change in the quantity supplied.
If any determinant other than price changes,
the effect is shown by a shift in the whole supply curve. We call this effect ‘a change in supply. A rightward shift represents an increase in supply; a leftward shift represents a decrease in supply.
If the demand for a good exceeds the supply
there will be a shortage. This will lead to a rise in the price of the good.
If the supply of a good exceeds the demand
there will be a surplus. This will lead to a fall in the price.
Price will settle at the
equilibrium. The equilibrium price is the one that clears the market: the price where demand equals supply.
If the demand or supply curve shifts
this will lead either to a shortage or to a surplus. Price will therefore either rise or fall until a new equilibrium is reached at the position where the supply and demand curves now intersect.
A free-market economy functions
automatically, and if there is plenty of competition between producers, this can help to protect consumers’ interests.
In practice, however, competition may be limited:
there may be great inequality; there may be adverse social and environmental consequences; there may be macroeconomic instability. Consequently, governments intervene in market economies in various ways in order to correct the failings of the free market.
Traditional economics is based on
on the premise that consumers act rationally, weighing up the costs and benefits of the choices open to them. Behavioural economics acknowledges that real-world decisions do not always appear rational; it seeks to understand and explain what economic agents actually do.
A number of effects can explain why rational decision making may
fail to predict actual behaviour. These include: the roles of framing and relativity; individuals failing to disregard sunk costs and being confused by too many choices. Research undertaken by behavioural economists is bringing together aspects of psychology and economics, in order to understand fully how we behave.
