Supply and Demand Flashcards
Market
A market is any place or situation where buyers and sellers or their agents make contact to negotiate prices and quantities of a good and service to be traded
Law of demand
The empirical observation that when the price of a product falls, people demand larger quantities of it
Law of supply
The empirical observation that when the price of a product rises, firms offer more of it for sale
Real price of a product
Its price relative to other goods and services
Factors that shifts the demand curve
- Income (Normal and inferior goods)
- Tastes
- Price of substitutes & compliments
- Expectations
- Population
Determinants of demand
- Price
- Income (Normal and inferior goods)
- Tastes
- Price of substitutes & compliments
- Expectations
- Population
Factors that shift the supply curve
- Technology
- Factor prices
- The number of suppliers
- Expectations
- Weather
Determinants of supply
- Price
- Technology
- Factor prices
- The number of suppliers
- Expectations
- Weather
Excess supply
The amount by which quantity supplied exceed quantity demanded at a specific price
Excess demand
The amount by which quantity demanded exceeds quantity supplied at a specific price
Welfare properties of equilibrium
If price and quantity take anything other than their equilibrium values it will always be possible to reallocate so as to make at least some people better off without harming others
Consumer surplus
What the consumers pay less than they are willing to pay
Producer surplus
What producers receive more than what they are willing to sell for
Price supports / Price floor
- Minimum price for a good, established by law, and supported by government’s offer to buy the good at that price
- It requires the government to become an active buyer in the market
- Purpose of farm price supports is to ensure prices are high enough to provide adequate income for farmers
Price ceiling
- Maximum level above which the price of a good is not permitted by law to rise
- Eg rent control ensure rich property owners do not exploit the poor, but the economic consequences are no less damaging
Functions of price
- Rationing function
- Allocative function
Rationing function of price
The process whereby price directs existing supplies of a product to the users who value it most
Allocative function of price
The function whereby price acts as a signal that guides resources away from the production of goods whose price lie below cost to the production of goods whose prices exceed cost
Effect of a level tax levied on the seller
- Add the tax to the price at each quantity supplied
- Shifts the Supply curve upwards
Seller’s proportion of tax
Ts = (P0 - (P1 - T)) / T
Buyer’s proportion of tax
Tb = (P1 - P0) / T
Elasticity and tax levied on the seller
- The more inelastic the demand curve, the higher the proportion of the tax the producer pays
- The more elastic the demand curve, the higher the proportion of the tax the buyer pays
Effect of a level tax levied on the buyer
- Add the tax to the price at each quantity demanded
- Shifts the Demand curve upwards
