Supply + Demand Flashcards
What does demand represent?
Demand represents marginal benefit of consumption
Price increase (demand)
If price increases, quantity demanded decreases - inversely proportional to eachother
What is the income effect?
The income effect states that as a good becomes cheaper, people can afford more of a good, thus increasing demand (purchasing power increases)
Works both ways
What is the substitution effect?
As a good becomes cheaper than other goods, we substitute away from the expensive alternative and towards the cheaper one
Works both ways
If the price changes what happens to the demand curve?
This is a movement up and down a demand curve, which means the curve itself does not shift - ΔP=movement along curve
When does the demand curve shift?
When there is a change in non-price determinants, the demand curve shifts left or right
NPD - Income
Affects ability to pay for g+s
For normal goods, increase in income means increase in demand
For inferior goods, increase in income means decrease in demand
NPD - Tastes + Preferences
Affects perceived benefit and willingness to pay
EG - fashion trends, ads etc
NPD - Price of related goods - SG
Substitute goods - Used as alternatives to eachother
If if theres an increase in the price of butter, demand for margarine will increase as its cheaper
NPD - price of related goods - CG
Compliment goods - Used together
If the price of bread increases, both the demand for bread and butter would decrease
NPD - Congestion effects
Increase in use of a good - thus devaluing it
Designer handbags
NPD - Network effects
When a good becomes more useful due to be being used by more people
Iphones, internet
NPD - expectations of future price changes
If prices are expected to increase in the futute, people will buy as much as they can - demand increases
If prices are expected to decrease in the furute, the delay the purchase of the good for as long as possible - demand decreases
Demand shifts
Decrease in demand - shift left
Increase in demand - shift right
Supply
Willingness and ability to provide a good or service at a price
What does a change in price cause (s)
A change in price causes suppliers to react to this change by changing quantity supplied
NPF - S - Natural condition for production
Production affected by natural conditions
NPF - S - Price of inputs
All g+s require inputs to produce them
If price of inputs increases, supply decreases and vice versa
NPF - S - Productivity and technology
Ability to combine resources more efficiently - increase leads to increase in supply
NPF - S - Prices of Substitutes in production
Goods that use similar inputs
Land used for dairy cows can be used for producing crops if price of wheat is higher than the price of milk
NPF - S - Expected future prices
If firms expect prices to be higher in the future they may decrease supply now and incease it later
NPF - S - Change in type and number of firms
More sellers = more supply = decrease in cost - eg smartphones and tvs
Steps in Market analysis
1 - Which curve affected
2 - how is it affected
3 - How does the market adjust
4 - Consequences to price and quantity supplied/demanded
