Supply and demand Flashcards
Why does supply have a positive slope?
Supply curve represents the seller’s motivation to produce at difference price points. Since suppliers are profit motivated, they will be more willing to supply greater quantities at higher prices, hence why the supply curve has a positive slope.
Law of supply - states that, all other factors being equal, as the price of a good or service increases, the quantity of goods or services that suppliers offer will increase, and vice versa. As the price of an item goes up, suppliers will attempt to maximize their profits by increasing the number of items for sale.
Why does demand have a negative slope?
Demand curve represents the planned purchases of consumers at each possible price. The law of demand states that there is an inverse proportional relationship between price and demand of a commodity. Caused by law of diminishing marginal utility, income effect , substitution effect.
What is the law of diminishing marginal utility?
When a consumer buys more units of a commodity, the marginal utility of that commodity continues to decline. Therefore, the consumer will buy more units of that commodity only when its price falls. When less units are available, utility will be high, and the consumer will be prepared to pay more for the commodity. This proves that the demand will be more at a lower price, and it will be less at a higher price. That is why the demand curve is downward sloping.
What is the income effect?
When the price of a commodity falls, the real income of the consumer increases because they have to spend less in order to buy the same quantity. On the contrary, with the rise in the price of the commodity, the real income of the consumer falls. The income effect of a change in the price of an ordinary commodity being positive, the demand curve slopes downward.
What is the substitution effect?
With the fall in the price of a commodity, the prices of its substitutes remaining the same, consumers will buy more of this commodity rather than the substitutes.
What is the difference between a shift of the curve and a movement along the curve?
A movement refers to a change along a curve. The demand and supply relationships remain consistent. For a demand curve, a movement occurs when a change in the quantity demanded is caused only by a change in price. For a supply curve, a movement occurs when a change in quantity supplied is caused only by a change in price.
A shift in a demand or supply curve occurs when a good’s quantity demanded or supplied changes even though price remains the same. The quantity demanded/ supplied is affected by factors other than the price. Other determinants for demand and supply would be income or price of a substitute.
When a tax is imposed, what does the consumer surplus, producer surplus and deadweight loss refer to?
Consumer surplus is the difference between what a consumer is willing to pay and what they actually pay.
Producer surplus is the difference between the lowest price producers are willing to accept and the price they actually receive. Producer surplus is the difference between the lowest price producers are willing to accept and the price they actually receive.
Deadweight loss is a decrease in efficiency caused by a market not reaching a competitive equilibrium.
