Supply and Demand Flashcards
Why is the supply curve upward sloping?
When the price of a good increases, there is an incentive for suppliers to produce more of the good and sell it at a higher price
What is economics?
Economics is the study of how people interact with each other and with their natural environment in producing their livelihoods, and how this changes over time
What is positive economics?
It explains how the economy works without any recourse to personal value judgement
What is normative economics?
It explains how the economy ought to work and therefore involves an ethical or moral judgement
Why is the demand curve downward sloping? (3 reasons)
Diminishing marginal utility, income effect, substitution effect
What is diminishing marginal utility?
The more one consumes, the less extra satisfaction we feel for each additional unit. Hence one is only willing to consume the next unit if it’s price is lower than the previous (downward sloping demand)
What is the income effect?
How a change in demand for a good is affected by a change in real disposable income. If prices rise, disposable income decreases, therefore demand will decrease as a result of lower disposable income
What is the substitution effect?
How a change in price of a good affects demand compared to others. An increase in the price of a good will encourage consumers to buy different goods, assuming the same level of income.
What happens to supply, demand and prices when there is an increase in DEMAND for a good?
The demand curve will shift to the right (demand is higher at each possible price), prices will rise as a result of the shift, so there will be an increase in the quantity supplied, which is a movement along the supply curve (not a shift).
What happens to supply, demand and prices when there is an increase in SUPPLY for a good?
Supply shifts downwards, prices will decrease (as there will be excess supply), there is a movement along the demand curve to a new equilibrium with a lower price and higher quantity demanded
What is consumer surplus?
Difference between the price consumers are willing to pay and the price they actually pay
What is producer surplus?
Difference between the price sellers are willing to sell for and the price they actually receive
Define own price elasticity of demand (PED)
PED measures the responsiveness of the quantity demand of a good to a change in its own price
What sign does PED have? Give examples of elastic (>1) and inelastic (<1) goods?
Negative - represents negative relationship between price and demand
Elastic - normal/luxury goods e.g. package holidays
Inelastic - necessities e.g. wheat
Is demand more elastic or inelastic in the long-run? Why?
Elastic - consumers have had time to process the price change and adjust their expenditures accordingly
