Supply and demand Handout 2 Flashcards
define a market
a mechanism where buyers and sellers trade goods and services with each other
what do buyers want?
satisfactory goods and services and value for money
therefore they demand goods and services from suppliers and if they are not satisfied they will find an alternative supplier
what do sellers want?
to make profit and they will supply consumers goods if they demand it, if they don’t they they will not supply it
define demand
the amount of good/service which customers are willing and able to purchase at a given price and within a given time period
define supply
the amount of goods/services sellers are able and willing to provide at a time at a given price
define equilibrium
price equilibrium is found when the quantity demanded is equal to the quantity supplied.
how do the forces of demand and supply dictate the price of a good/service?
if demand for a product exceeds supply the price will increase as businesses will take advantage of high demand
if supply was to exceed demand the price of a good will decrease because businesses will want to avoid a surplus so lowers the prices to encourage demand and clear excess stock
give 8 factors that affect demand and expand them (PACIFICL)
PRICE -
an increase in price means fewer people are able and willing to purchase the good, therefore demand will decrease
if price were to decrease more customers would be able and willing to purchase the good so demand would increase
ADVERTISING -
relates to the marketing and promotion of a product
increases the customer’s willingness to purchase the good
as advertising increases, demand should increase as more consumers are aware of the product and vice versa
CHANGE IN PRICE OF SUBSTITUTES -
substitutes are alternative goods which fulfil the same need/want
when the price of a substitute increases, demand increases as consumers will switch to the cheaper alternative
INCOME -
if income increases, consumers will have more disposable income to spend on luxuries therefore demand for those will increase
if income levels decrease consumers are likely to purchase more inferior goods than luxury goods
FASHION -
some products are subject to changes in tastes and fashions eg skateboards
INTEREST RATES -
interest is the cost of borrowing money or the return on saving money
if interest rates increase, borrowing becomes more expensive so demand for goods purchased on credit will decrease
consumers are less willing to borrow and more focused on repaying current debts
CHANGE IN PRICE OF COMPLEMENTS -
complements are goods that are often purchased/used together so demand for them is linked
if the price of one of the products increases, demand for both products will decrease
LEGISLATION -
gov. legislation can affect demand for products eg a law saying everyone should wear helmets when riding a bike, demand for helmets will increase at a given price
what does the law of demand state?
higher the price the lower the quantity demanded
lower the price the higher the quantity demanded
consumers less willing and able to buy as prices rise
results in a downward-sloping demand curve
what causes the demand curve to shift?
anything other than price changes will cause the demand curve to shift
if the change causes demand to increase the curve shifts to the right
if the change causes demand to decrease the curve shifts to the left
what are 6 factors that affect supply?
PRICE -
as price increases supply will increase
supplier will be more willing to supply at that price as they will make higher revenue and profit
as price decreases supply will decrease
supplier will be less willing to supply at that price as they will make lower revenue and profit
COSTS OF PRODUCTION -
costs - marketing, raw materials, rent
as cop increases supply will decrease as firms are less willing to supply at a given price as they will make a lower amount of profit
as cop decreases supply increases as firms are more willing to supply at a given price as they would make a higher profit
VAT/CORPORATION TAX -
changes in taxes payable mean a change in firm’s overall costs
increases in tax mean firm’s ability to supply at a given price would fall as their profits at that price would decrease
decreases in tax mean firm’s ability to supply at a given price rises as their profits at that price will increase
SUBSIDIES -
refers to support or payments to businesses from the government
to encourage provision of good/service
increase in subsidies increase in supply as firms more willing to supply at a given price as they would benefit from the subsidy
decrease/removal in subsidies decreases supply as no longer benefit from subsidies
THE WEATHER -
any weather condition that affects a firm’s ability to supply good
adverse weather often reduces a firm’s ability to supply a product as products may have been damaged or not possible to provide goods
IMPROVEMENTS IN TECHNOLOGY -
refers to firm employing more capital in production process
means firm can produce on larger scale and reduce unit costs
should increase a firm’s ability and willingness to supply a product
what causes supply curve to shift?
if change causes supply to increase, curve shifts to the right
if decreases, curve shift to the left
what happens to demand and supply if the price of a good is higher than the equilibrium price?
there is excess supply and low demand
sellers decrease their prices so that demand increases
what happens to demand and supply if the price of a good is lower than the equilibrium price?
excess demand and limited supply
sellers increase their prices
when are double shifts required?
when the question asks for supply and demand
