Supply, Demand and Equilibrium Flashcards
Define demand
The quantity of a good or service that consumers are willing and able to purchase at any given price
Why is demand downward sloping
For consumers, price and quantity have an inverse relationship: as price increases, fewer units are demanded:
The income effect
The substitution effect
Diminishing marginal utility
What is the income effect (demand)
When prices go up your income is worth less- your income has less purchasing power
The substitution effect (demand)
If hobnobs ⬆️ by 50p, you buy digestives- the OC of 1 good, in terms of what you could have bought in the sub, goes up- so if p ⬆️, the good more expensive relative to the sub
What is diminishing marginal utility (group level) (demand)
Group level: Each new consumer brought into the market gains less utility from consuming a good than the last 1 did, so to attract new consumers, ⬇️ price so they would be willing to pay
What is diminishing marginal utility (individual level) (demand)
The more an individual consumes of a gd, the less utility gained from extra unit consumed so the less you’ll pay for it- so p must fall.
For both: the D curve represents a consumers willingness to pay, which depends on utility
What are Movements along the demand curve
Caused by a change in P and represents a change in qd
Contraction ⬅️ (less qd)
Extension ➡️ (more qd)
What is a shift in the demand curve
Signifies ⬆️ in the qd at any given p
At all p more of the good is sold than before
What is a shift in demand caused by
Anything other than price, e.g. seasonal, or a good marketing campaign
What are movements in the demand curve caused by?
What most commonly causes the change in price is a shift in supply, or could be gov policy e.g. a min price
Shift in demand caused by:
Complements changed in price
If P of the complement ⬇️ then demand for other good ⬆️
e.g. cereal and milk
Shift in demand caused by:
Change in price of sub
If p sub ⬆️ then demand for other good shifts out
Shift in demand caused by:
Derived demand
E.g. cows and cattle feed- if D for beef goes up,then need more cattle feed
Shift in demand caused by:
Changes in income
If income increases, nearly everything shifts out, apart from like spam
Shift in demand caused by:
Changes in population
Ageing population means more demand for stuff like care homes
What is Supply
The q to of a good/ service that producers are willing or able to supply at any given price
Why is supply upwards sloping
For producers, p and q have direct relationship- as p ⬆️, more units are offered for sale and vice versa- as p ⬆️, qs ⬆️- this is the law of supply
Why is Supply upward sloping:
Profit incentive
If p ⬆️, profit from each unit ⬆️, so more incentive to sell. OC of not selling has gone up
Why is Supply upwards sloping:
Covering costs of production
Producers have different prod costs (e.g. cheaper to extract oil Saudi Arabia than Alaska). When p low, only producers with low prod costs willing to supply, so low qs- p determines which firms will enter or exit the market
What are Movements along an S curve caused by?
Caused by a change in price
Most common cause of a change in price is a change in demand; due to gov regulation of price
Movements along a supply curve
Extension ➡️
Contraction ⬅️
What causes a shift in supply
Anything other than a price which affects supply will shift it- an increase in qs at any given price
What causes a shift in supply:
Technology
If new tech introduced to the prod. process lead to fall in cost of prod. - greater productive efficiency so firms can produce more at the same p so S curve shifts out
What causes a shift in supply:
Expectations
The weather
Competitive supply
E.g. stockpiling goods, predicting future events
In agricultural markets e.g. bad yields
Change in p of competing goods
What causes a shift in supply:
Costs of production
Joint supply
If costs of prod. ⬆️ then firms will ⬆️ the price at any given level and it will shift upwards and to the left and there will be a fall in S
Change in P of 1 good shifts the S curve outwards for the good in joint supply e.g. beef and leather
What is Excess Demand caused by
When the price is too low
What is excess supply caused by
Caused when price is too high
Extension is…
…always headed toward the right
Contraction is…
… always headed towards the left
Steps for equilibrium
Shift Excess at the old price Pressure on the price Price change (p2) Extension and contraction Then equilibrium or q2
1st function of the price mechanism:
Signaling function of price
used by buyers and sellers to see where/ whether they shld buy or sell
P changes show where resources r needed: ⬆️p signals firms to enter market
2nd function of the price mechanism:
Incentive
Higher prices encourage suppliers to sell more of good- which is needed in times of high demand.
Lower prices encourage buyers to purchase more of the good- needed when there is excess supply
3rd function of the price mechanism:
Rationing
When scarce resources, p ⬆️ due to excess D, the p ⬆️ discourages D so ‘rations’ resources, and so, limited supply will be ‘rationed’ (i.e. prioritised) to those buyers prepared to pay a high enough price
Define consumer surplus
Difference between the max price a consumer would be willing to pay (D curve) and the actual price they pay
(If I was willing to pay £200 for a dress and acc paid £40 then my CS is £60)
Define equilibrium
When S meets D, the market equilibrium, aka, market clearing price
What is the price mechanism
Resources are allocated in free market by price mechanism (solves economic prob of scarcity), moves resources to where they’re demanded and in shortages removes resources from a surplus
What is CS on a graph
The sun of all vertical distances between market p and the D curve
Define producer surplus
The difference between the min p producers would be willing to sell at and the p they actually receive
Define total welfare
The additional ‘happiness’ that is generated in a market by the transactions that take place,
Maximised when S=D (MC=MB), so always points to Qso
=CS+PS
