Micro 2.2, 2.3, 2.4, 2.5 Demand, Supply and Market Equilibrium Flashcards
The operation of the market
Demand
A consumer’s willingness and desire to purchase goods and services at a specific price.
Individual demand
One consumer’s willingness and ability to purchase a product or service at a given price.
Market demand
The sum of all consumers’ willingness and ability to purchase a product or service at a given set of prices.
The demand curve
The relationship betweent the price of a product and the quantity demanded by the market.
Prices changes and the demand curve
When prices change, there is a movement along the demand curve.
Contraction of demand
When there is an increase in price, there is a decrease in the quantity demanded.
Extension of demand
When there is a fall in price, there is an increase in the quantity demanded.
Joint demand
Where products complement each other. They products in demand together e.g. cars and petrol
Competitive demand
When consumers demand one or another good- they are in competition with each other. They are substitutes. e.g. Samsung phones and Apple phones.
Composite demand
When a product is demanded for multiple uses e.g. milk or oil
Shift in the demand curve
When the demand curve shifts left or right do there is a change in the quantity demanded at every price.
Increase in demand…. the demand curve shifts
Right
Decrease in demand….the demand curve shifts
Left
Factors which can cause a shift in the demand curve…
Changes in income, taxes, price of complementary or substitute goods, tastes and fashions, advertising and marketing, size of population etc.
Supply
Ability and willingness of a firm to sell products at a given price.
Individual supply
One business’s willingness and ability to sell a product at a given price.
Market supply
Sum of all businesses’ willingness and ability to sell a product at a given set of prices.
Supply curve
Relationship between the price of a product and the quantity supplied by the business.
Joint supply
When products are produced together e.g. one product is a by-product of another.
Competitive supply
When a producer has alternate uses for the factors of production and so decides what to produce.
Movements along the supply curve
When the supply of a good changes according to the price.
Extension of supply
There is an increase in price so the quantity supplied increases
Contraction of supply
When the price falls the quantity supplied decreases.
When the supply curve shifts
The supply to the market changes at all prices.
An increase in supply
The whole supply curve shifts outwards or moves to the right.
A decrease in supply
The whole supply curve shifts inwards or moves left.
Factors that affect the supply
These a linked to the factors of production, other products supplied and government policies.
Short run
In the short run, at least one of the factors of production are fixed.
Long run
All the factors of production can change.
How do factors of production affect supply?
Cost of labour, cost of capital, cost of land, technology.
How does taxation affect supply?
If taxes on businesses increase, supply will decrease as there is less incetive to supply goods or services. This is an inward shift of the supply curve.
How do subsidies affect supply?
If the government pays firms to supply goods, this will increase supply and the supply curve will shift outwards.
Price of jointly supplied products increases, what will happen to supply?
Supply of both goods will increase as the firm supplies more of both goods.
Price of competitively supplied products increases..
A firm may switch to the higer priced item as it may receive greater profits.
Market equilibrium
Point at which the quantity supplied is equal to the quantity demanded of a particular product. This is where the price is agreed.
Market disequilibrium
A situation where there is excess demand or excess supply.
Excess supply
A situation where the price is too high and there are unsold products on the market.
Excess demand
A situation where the price is too low meaning there are unsatsifed consumers in the market.
Price mechanism
The price plays three roles in the market- signalling, incentivising and rationing.
Incentivising
The price gives an incentive to producers to increase or descrease output as they think about their profits.
Rationing
The price means agents alter their behaviours in the market to change their demand or supply.
Allocative efficiency
The free market is allocatively efficient because the price= the cost of producing the last product supplied to the market. This is where consumers are all receiving what they are demanding.
Productive efficiency
The free market incentivises firms to produce at their lowest average costs.
Consumer surplus
Difference between the price consumers are willing to pay and the market price. If they were willing to pay above the market price- there is consumer surplus.
Producer surplus
Difference between the market price and price producers were willing to supply the market at. If producers were willing to supply at lower than the market price, there is producer surplus.
