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
