Supply and Demand Flashcards
Demand
The quantity that people are willing and able to buy at a given price
Relationship between Supply and Demand
As demand increases, price decreases
Latent Demand
Where people are willing but not able to buy a good
Derived Demand
Where people demand a product because of demand of another product
Law of Demand
Increase in price causes a decreased quantity
If price decreases then quantity increases
Inverse relationship between P and Q
Why the demand curve is downward sloping
Law of Diminishing Marginal Utility
Substitution Effect - when the price falls, the good becomes cheaper than its substitutes so some consumers switch their purchases from the more expensive substitutes
Income Effect - when the price of a good falls, a consumer’s real income may increase and the purchasing power of a consumer’s nominal income has increased, so more can be bought
Law of Diminishing Marginal Utility
Where the extra utility of 1 unit is worth less than the unit before
Ceteris Paribus
The assumption that other things (not supply and demand) remain constant or equal
Factors causing a shift in the demand curve
P - population
A - advertising
C - city speculators (expected future price changes)
I - income / income tax
F - fashion / trends
I - interest rates
C - complimentary goods
S - substitues
A restaurant in London offers an ‘all you can eat buffet for £8.99’. At this price you can refill your plate as many times as you like.
With reference to the statement above explain what is meant by ‘diminishing marginal utility’
For every additional plate of food consumed, additional satisfaction gained by the consumer decreases
More food consumes = less hungry and the consumer might start to feel sick which is the same as being less satisfied
Supply
The quantity of a good / service that a firm is willing and able to sell at a given price in a given time period
Why the supply curve is upward sloping
Profit Motive - as price increases, firms are encouraged to increase quantity supplied
Production Costs - as firm’s output increases, production costs increase so in order to cover costs, higher prices must be charged
New Entrants - higher prices create incentive for new firms to enter the market, increasing quantity supplied
Subsidies
Government grant given to firms to lower cost of production and increase supply
Factors that shift supply curve
P - productivity
I - indirect tax
N - new entrants
T - technology
S - subsidies
W - weather
C - cost of production
Ceteris Paribus must be assumed
Subsidies result in:
Decrease cost of production so increase in supply
