MICRO - 2. demand and supply ✅ Flashcards
what is demand, individual demand and effective demand
DEMAND - quantity of good/service consumers willing to buy at given price & period
INDIVIDUAL DEMAND - each of us have individual demand and reflects value we place on product
EFFECTIVE DEMAND - desire to buy backed up by ability to pay
what is derived demand
demand for factor of production used to produce another good or service eg:
steel demand strongly linked to demand for cars
transport, with increase in demand for air travel demand rises for pilots
what is involved within the law of demand
INVERSE relationship between price of good and demand
as prices fall, expansion of demand
as prices rise, contraction of demand
ceteris paribus allows us to isolate effect of one variable on another variable
what does demand curve demonstrate
relationship between price of item and quantity demanded
changes in price only cause a movement along demand curve, NOT shift
why is more demanded as price falls
- INCOME EFFECT - when price falls same consumption maintained for less expenditure so increase in real income and more product can be bought
- SUBSTITUTION EFFECT - when price falls product cheaper than alternative so spending can be switched and willingness and ability to buy increases and opportunity cost falls
what are the conditions of demand
- changing prices of substitutes, complements (competitive and joint demand)
- real income and distribution of income (equal distribution = higher demand) changes
- advertising/ marketing effects
- interest rates and demand
- change in age/size structure of population
- seasonal factors of some goods/services
- social and emotional factors
what is total and marginal utility
total utility - total satisfaction from given level of consumption
marginal utility - change in satisfaction from consuming extra unit
economic theory marginal utility diminishes as more consumed
why is demand curve downward sloping
marginal utility diminishes with extra units
what is the paradox of value
aka diamond water paradox
water low in price but high in demand but diamond also high in demand but high in price
changes in perceived utility directly effects levels of demand
what are social and emotional demand factors
behavioural economics considering social, psychological and emotional factors affecting choices and preferences as we are influenced by others
SOCIAL FACTORS:
- social awareness
- social norms, changing norms
- social pressures
EMOTIONAL FACTORS:
- emotional arousal affecting demand
- binge drinking, football games. health insurance
what is involved with the law of supply
supply is quantity of product producer willing and able to supply onto market
as price of product rises, businesses expand supply and curve shows this relationship between price and willingness to supply
why is the supply curve upward sloping
- PROFIT MOTIVE - market price rises after demand rises so more profitable for businesses to expand output
- PRODUCTION AND COSTS - output expands so production costs rise so higher price needed to cover these costs, effects of diminishing returns
- NEW ENTRANTS TO MARKET - higher prices creating incentives for others to enter market so total supply increases
meaning of shifts in supply curve
inward shift = decrease in supply
outward shift = increase in supply
conditions of supply
- changes in production costs (lower = more supply, higher = less)
- changes in technology
- government taxes, subsidies and regulations
- changes in climate in agricultural industries
- change in price of substitutes
- number of producers in market and objectives (downward pressures on price as supply increases when new businesses enter market, outward shift if businesses focus on market share rather than profits)
