Mod 2 - Topic 1 - Supply and demand Flashcards
What is demand?
Quantities of a good or service that people are ready (willing and able) to buy at various prices within some given time period.
What is market demand?
The sum of all the individual demands.
What is the law of demand?
The inverse relationship between price and the quantity demanded of a good or service.
What does a change in price lead to (with regard to demand) and how is this shown on a graph?
It changes the quantity demanded and is shown as a movement along the demand curve.
What does a change in non-price factors lead to (with regard to demand) and how is this shown on a graph?
It changes the level of demand and is shown as a shift in the demand curve.
What are the non-price determinants of demand? (5)
1) tastes and preferences
2) income
3) prices of related products
4) future expectations
5) number of buyers
What is supply?
The quantities of goods or services that people are ready to sell at various prices within some given time period.
What does a change in price lead to (with regard to supply) and how is this shown on a graph?
Changes the quantity supplied and is shown as a movement along the supply curve.
What does a change in non-price factors lead to (with regard to supply) and how is this shown on a graph?
It changes the level of supply and is shown as a shift in the supply curve.
What are the non-price determinants of supply? (5)
1) costs and technology
2) prices of other goods or services offered by the seller
3) future expectations
4) number of sellers
5) weather conditions
What is the equilibrium price?
The price that equates the quantity demanded with the quantity supplied
What is the equilibrium quantity?
The amount that people are willing to buy and sellers are willing to offer at the equilibrium price.
What is a shortage?
A market situation in which the quantity demanded exceeds the quantity supplied - shortage occurs at a price below the equilibrium level.
What is a surplus?
A market situation in which the quantity supplied exceeds the quantity demanded - surplus occurs at a price above the equilibrium level.
What is comparative statistics?
It is a form of sensitivity (what if) analysis and is commonly used in economic analysis
What is the 5 step process of comparative statistic analysis?
1) state the assumptions needed to construct the model
2) begin by assuming the model is in equilibrium
3) Introduce a change in the model creating disequilibrium
4) find the new point at which equilibrium is restored
5) compare the new equilibrium point with the old one
What is the Short-Run? (2)
It is the period of time in which:
- Sellers in the market respond to a change in equilibrium price by adjusting variable inputs
- Buyers in the market respond to changes in equilibrium price by adjusting the quantity demanded for the good or service.
What do short-run changes show?
The rationing function of price, which is the increase/decrease in price to clear the market of any shortage or surplus.
Why is rationing function of price considered to be a short-run function?
Because both buyers and sellers are expected to respond only to price changes.
In the short-run, what will:
a) an increase in demand cause?
b) a decrease in demand cause?
a) the price and quantity to rise
b) the price and quantity to fall
In the short-run, what will:
a) an increase in supply cause?
b) a decrease in supply cause?
a) the price to fall and the quantity to rise
b) the price to increase and the quantity to fall
What is the long-run? (4)
It is the period of time in which:
- new sellers may enter a market
- existing sellers may exit the market
- existing sellers may adjust fixed factors of production
- buyers may react to a change in equilibrium price by changing their tastes and preferences.
What is Adam Smith famous for?
Referring to the shifting of resources into and out of markets in response to price changes as the invisible hand.
What does the long-run show?
The guiding or allocating function of price, which is the movement of resources into or out of markets in response to a change in the equilibrium price.
How does a short-run increase in demand (which causes prices to rise) play out in the long-run?
Supply increases as new sellers enter the market and original sellers increase their production capacity.
How does a short-run decrease in demand (which causes prices to fall) play out in the long-run?
Supply decreases as less profitable firms or those experiencing losses exit the market or decrease production.
How does a short-run increase in supply (which causes the price to fall) play out in the long run?
Demand increases as tastes and preferences of consumers eventually change in favour of the product relative to substitutes.
How does a short-run decrease in supply (which causes the price to increase) play out in the long run?
Demand decreases as tastes and preferences of consumers eventually change away from the product and toward the substitutes.
What is perfect competition?
Where the forces of supply and demand are the sole determinants of the market price. Ie. price is not influenced by any single firm.
What is market power? and where does this occur? (5)
Market power is the power to set the market price and it occurs where there is imperfect competition, so individual firms exert power over price due to:
- size
- product differentiation
- advertising
- brand / name
- features or service
