Supply, demand and Equilibrium Flashcards
Effect of changes in S on market equilibrium
Supply falls = curve shift to the left, disequilibrium, a shortage
Supply rise = curve shift to the right, disequilibrium, a surplus
Sequence of events as market moves position
- Market in original position
- Non price factor disturbs, curve (s/d) shifts from point 1-2
- Now a surplus/shortage at price 1
- Producer discount/raise price to eliminate s/s
- (Say price is falling) producers contract quantity supplied, some consumers return to the market, expanding q demanded
- Process continues until surplus/ shortage disappears and a new equilibrium reached at P2,Q2
Effect of changes in demand on market equilibrium
Demand falls = d curve shift to the left, creates disequilibrium, a surplus
Demand rises = d curve shift to he right, creates disequilibrium, a shortage
Law of demand
The higher the price the less quantity demanded, the lower the price the higher the quantity demanded
Demand always downward sloping to the right bc
Of the law of demand that states demand has an inverse relationship to price
Substitution effect
A factor effecting strength of demand
When the price of one good rises, other goods become more attractive to buyers because they are relatively cheaper. A rise in price will drive consumers to switch to relatively cheaper subs should they offer the same level of satisfaction, eg. in principle coffee and tea
Income effect
A factor effecting strength of demand
When the p of a good rises consumers are not willing to purchase as much of the good because their real income/purchasing power has decreased
Eg. Price of pizza pie
The inverse relationship between price and quantity is due to
consumers making rational choices following the law of demand, the higher the price the less demanded to protect real income
Individual demand
Refers to q of a product demanded by an individual consumer at any given price
A consumer will demand a product of the benefit they expect to receive from the product is equal to or greater than the price they must pay
Thus increasing consumer surplus
Market demand
Includes the individual demand of all the participants in a market
Simply the horizontal (add everyone up) of individual demand curves
Factors effecting demand
Price (movement along the demand curve)
Non price factors (shifts in demand)
Income (levels of disposable income)
Population (demographic factors- ages with different demands, % of those people in an area)
Tastes and preferences (fashion, new information)
Price of substitutes (coffee and tea) and compliments (accessories to technology also required when purchased)
Expected future prices (price rising so start hoarding)
Expansion and contraction
Cause by price factors, movement along demand curve
Increase and decrease in demand
Shifts of demand curve
Non-price factors
Exceptions to the law of demand
Veblen goods
Griffen goods
Experience goods
Bandwagon goods
A rise in p appears to create an expansion in q demanded rather than a contraction
Veblen goods
Value or benefit comes from exclusivity, ‘snob factor’,
Buyers undertake ‘conspicuous consumption’
Benefit comes from beings seen by others consuming a good
Higher the p, more exclusive, more benefit people get from being seen owning
Griffen good
Inferior, stable goods
Demand rises as income falls
Eg. Ramen noodles
Take up a large share of a persons income, esp when incomes are low
Griffen saw in Ireland People have to rely on potatoes when they couldn’t afford superior alternatives as well
Experience goods
Consumers facing information gap
Difficult to judge quality goods, eg. Which brand of LED TV is best
Make a choice in the assumption that there is a positive correlation between price and quantity
Bandwagon effect
A change in p for share of a company may be seen as an indication of further price changes
A rational consumer may therefore increase demand to be well positioned for future rises in p
Similarly a fall, indication of further falls, sell before rather falls take place
Law of supply
The higher the price the more will be supplied, the lower the price the less will be supplied
Why a positive relationship between d and s
Because producers are profit driven they wish to maximise profit through a higher price margin, the more willing to increase quantity at a higher price
Individual and market supply curves
The individual supply curves represents the supply provided from a single producer whereas the market supply curve demonstrated the supply from all producers in the market
Factors effecting supply
Price Cost of production Factors of production Expected future prices Number of suppliers Technology
Equilibrium is
Is the point that the market clears, where s and d meet
If p is bellow equilibrium
There is excess demand
Consumers will have to compete for the product
Producers will raise p to max profit
If p is above equilibrium
There is excess supply
Price is dropped to clear market
Consumers will benefit from discounts or special offers
How does income effect demand
When income falls demand for most products fall as a consumers purchasing power has decreased
Explain how population effects demand
If pop increases potentially increase in market to increase demand
What factors effect the slope of the supply curve
Technical complexity (more complex, longer for new capacity)
Mobility of resources (ability and willingness to move to a new location)
Ability to hold stocks/inventories (perishable?)
Amount of unused capacity (spare capacity, can increase quickly)
Does supply rely on external factors (someone else on strike/ natural disaster)
How do factors of production effect s curve
Fruit and vegetable store wanting to sell corn, cyclone tears them up, limiting ability to sell corn
Firms dependant on supply chain
Tastes and preferences effect demand as
As fashion changes and new information is released it will likely impact a consumers choices, changing the demand curve
Prices of substitutes and complements affecting demand
Substitutes- when the price falls that good becomes more attractive demand will fall for the original good
Complement- as price rises demand will fall for a product as its now become more expensive to own
Expected future prices effect on demand
If expected to rise people may hoard, temporary increase in demand, in order to ‘be safe’ from price changes
Explain the link between PED and revenue
R= P*Q
When inelastic, change in Q demanded is small so limited impact on revenue
Elastic, large change in Q demanded, large impact on revenue
Revenue box
Continent way of showing revenue/ consumer outlay at different points on a demand curve
Calculated by Q*P
