Supply and Demand basics Flashcards
Why is the demand curve downward sloping
(3 reasons)
The income effect
The substitution effect
Marginal Benefit
What is the Income effect
At higher prices, consumers cannot purchase as much on the same income so demand falls
What is the substitution effect
At higher prices, the good becomes relatively more expensive compared to other similar goods on the market meaning consumers may switch to the cheaper option causing falling demand
What is Marginal Benefit
As you consume more of a good its value to you becomes less and less and the consumer is less willing to pay for each extra good. E.g, you are willing to pay the most for the first good and less the more you have
Reasons for shifts in Demand curve
(5 reasons)
Substitute good changes price
Complementary good changes price
Change in population
Change in income
Change in taste
A positive shift / increase in demand is a shift to the ________
Right
Why would there be a movement along the demand curve
A change in price
What’s another name for the demand curve
A marginal private benefit curve
The demand and supply curve illustrate a relationship between which two factors
Price and Quantity
Why is the supply curve upward sloping
(3 reasons)
Cost of production
Motive of profit
Attracting new firms
Explain motive of profit in relation to supply
If price rises due to x reason it is more profitable so firms increase production
Explain attracting new entrants in relation to supply
At higher prices more new firms enter market increasing supply
A positive shift / increase in supply is a shift to the ________
Right
Reasons for shifts in supply
(5 reasons)
Cost of production
Technical progress
Taxes imposed
Subsidies
Change in number of firms
Explain cost of production in relation to why supply is upward sloping
Producing an increasing quantity of a good means costs of production rises (exhaust the cheapest production inputs first) so firms must charge a larger price to receive the same profit
