Supply and Demand Flashcards by Elouise Mayall

What are the assumptions for demand

Rational actor
• Objective to maximise utility
• Make choices among alternative options
• Utility maximising choices are based on preferences

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What are the properties of preference

Transitivity
Non-satiation
Complete

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What is transitivity

The property of transitivity of preference says that if a person, group, or society prefers some choice option x to some choice option y and they also prefer y to z, then they furthermore prefer x to z.

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What is meant by non-satiation

More is always preferred to less

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what is meant by ‘complete’

For ANY 2 bundles, A and B, it is possible to state one of the following:
• A > B
• A indifferent B
• B > A

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What is an indifference curver

set of all
baskets of goods for which the
consumer is indifferent

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What is an indifference map

illustrates the set of indifference curves for a particular consumer

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What does the movement between indifference curve represent

Changes in utility

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What does movement along an indifference curve indicate?

Substitutions

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What does the shape of the indifference curve depend on

Preferences

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What does the slope of the budget constraint represent?

The cost of consuming an additional unit of good x in terms of good y

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What is the law of demand?`

The higher the price, the less we demand (it is an inverse relationship)

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How is market demand found

By making a table for everyone’s demands and adding across horizontally

The quantity demanded
in the market is the
sum of the quantities
demanded by all
buyers at each price

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What is a budget constraint

It limits how far away from the origin we go?

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When are things maximised in terms of IC and BC

When the indifference curve intercepts the budget constraint

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What is the ‘quantity demanded’

the amount of any good that
buyers are willing and
able to purchase

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What is a demand table

a table which shows shows the relationship between the price of a good and the quantity demanded

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What does profit maximisation require?`

cost minimisation

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How does one calculate profit?

Total Revenue –Total Cost

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what is needed to calculate Total revenue

Price * Quantity

what is needed to calculate total cost

Fixed costs + variable costs

What is the Law of diminishing marginal returns

As the use of an input increases with other inputs fixed, the resulting additions to output will eventually
decrease.

What is the returns to scale

rate at which output increases as inputs are increased proportionately

What is an isoquant

shows all possible

combinations of variable inputs that yield the same output.

what does movement between isoquants indicate

changes in output

what does movement along an isoquant indicate

indicates substitution

what does the shape of and isoquant depend on

depends on production technologies

How do you calculate the calculate the marginal rate of technical substitution

MRTS = − Change in capital input/change in labour input = − ΔK/ΔL (for a fixed level of q) (work out the gradient as if it were a straight line)

What does the slope of the isoquant at any point measure

measures the MRTS - the | ability of the firm to replace capital with labour while maintaining the same level of output.

what does the isocost curve show

shows the possible | combinations of inputs that can be obtained for a given expenditure / cost

What things can limit output?

* physical constraints (only so much land, water, etc available) * regulatory and legal constraints (fisheries quotas, emissions quotas)

where is the point of highest output along a isoquant

The output is the same all along the same isoquant

What is the Law of supply

price and supply are positively related, e.g. as price rises/falls, so does supply

What variable might shift the S curve

Input prices, technology

How does a change in price influence the seller

causes movement along the same curve

Assumptions of the competitive market

Rational producers and consumers Perfect information Many buyers and sellers, each has a negligible effect on price, i.e. buyers and sellers are so numerous that no one can affect market price – each is a “price taker” No transaction costs There are no missing markets (no externalities)

When is market equilibrium met?

where quantity supplied equals quantity demanded

What is Consumer Surplus

difference between what a consumer would have been willing to pay and what they actually pay for a good

Producer Surplus

difference between the amount a producer receives for a good and the minimum amount they would have been willing to accept

What is meant by excess supply

when quantity supplied is greater than quantity demanded, QS > QD

How does the market adjust when there is an excess surply

Facing a surplus, sellers try to increase sales by cutting the price. This causes D to rise and S to fall…which reduces the surplus. The price continues to fall until a new market equilibrium is reached

What is meant by the market having a shortage?

Quantity demanded is greater than quantity supplied | excess demand

How does the market adjust when there is an excess

Facing a shortage, sellers raise the price, causing D to fall and S to rise, …which reduces the shortage. Prices continue to rise until market reaches equilibrium The price rise encourages generators to produce more for the market.

what is the elasticity of demand

is a ratio of percent changes in quantity and price

What does the gradient of the demand curve represent

steeper the curve, the more inelastic the demand

Give some examples of elastic goods

Luxury goods and goods with lots of substitutes are often very elastic – if the price increases a little, then people will buy something else

Examples of inelastic goods

goods that are thought of as necessities with very few substitutes will be very inelastic. That is, no matter how expensive they get, we will still buy them, e.g. fuel.

What factors could result in supply being inelastic ie as price goes up a lot, quantity only goes up a little

Firm operating close to full capacity Running out of raw materials In the short term capital is fixed Limited factors of production e.g skilled labour Low levels of stock meaning they can't respond to increases in demand and price Planning restrictions e.g. homes are inelastic