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microeconomics > Supply, Demand and Equilibrium > Flashcards

Supply, Demand and Equilibrium Flashcards

1
Q

Define demand

A

The quantity of a good or service that consumers are willing and able to purchase at any given price

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2
Q

Why is demand downward sloping

A

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

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3
Q

What is the income effect (demand)

A

When prices go up your income is worth less- your income has less purchasing power

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4
Q

The substitution effect (demand)

A

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

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5
Q

What is diminishing marginal utility (group level) (demand)

A

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

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6
Q

What is diminishing marginal utility (individual level) (demand)

A

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

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7
Q

What are Movements along the demand curve

A

Caused by a change in P and represents a change in qd

Contraction ⬅️ (less qd)
Extension ➡️ (more qd)

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8
Q

What is a shift in the demand curve

A

Signifies ⬆️ in the qd at any given p

At all p more of the good is sold than before

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9
Q

What is a shift in demand caused by

A

Anything other than price, e.g. seasonal, or a good marketing campaign

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10
Q

What are movements in the demand curve caused by?

A

What most commonly causes the change in price is a shift in supply, or could be gov policy e.g. a min price

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11
Q

Shift in demand caused by:

Complements changed in price

A

If P of the complement ⬇️ then demand for other good ⬆️

e.g. cereal and milk

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12
Q

Shift in demand caused by:

Change in price of sub

A

If p sub ⬆️ then demand for other good shifts out

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13
Q

Shift in demand caused by:

Derived demand

A

E.g. cows and cattle feed- if D for beef goes up,then need more cattle feed

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14
Q

Shift in demand caused by:

Changes in income

A

If income increases, nearly everything shifts out, apart from like spam

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15
Q

Shift in demand caused by:

Changes in population

A

Ageing population means more demand for stuff like care homes

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16
Q

What is Supply

A

The q to of a good/ service that producers are willing or able to supply at any given price

17
Q

Why is supply upwards sloping

A

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

18
Q

Why is Supply upward sloping:

Profit incentive

A

If p ⬆️, profit from each unit ⬆️, so more incentive to sell. OC of not selling has gone up

19
Q

Why is Supply upwards sloping:

Covering costs of production

A

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

20
Q

What are Movements along an S curve caused by?

A

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

21
Q

Movements along a supply curve

A

Extension ➡️

Contraction ⬅️

22
Q

What causes a shift in supply

A

Anything other than a price which affects supply will shift it- an increase in qs at any given price

23
Q

What causes a shift in supply:

Technology

A

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

24
Q

What causes a shift in supply:

Expectations

The weather

Competitive supply

A

E.g. stockpiling goods, predicting future events

In agricultural markets e.g. bad yields

Change in p of competing goods

25
Q

What causes a shift in supply:

Costs of production

Joint supply

A

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

26
Q

What is Excess Demand caused by

A

When the price is too low

27
Q

What is excess supply caused by

A

Caused when price is too high

28
Q

Extension is…

A

…always headed toward the right

29
Q

Contraction is…

A

… always headed towards the left

30
Q

Steps for equilibrium

A 
Shift
Excess at the old price
Pressure on the price
Price change (p2)
Extension and contraction
Then equilibrium or q2
31
Q

1st function of the price mechanism:

Signaling function of price

A

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

32
Q

2nd function of the price mechanism:

Incentive

A

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

33
Q

3rd function of the price mechanism:

Rationing

A

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

34
Q

Define consumer surplus

A

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)

35
Q

Define equilibrium

A

When S meets D, the market equilibrium, aka, market clearing price

35
Q

What is the price mechanism

A

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

36
Q

What is CS on a graph

A

The sun of all vertical distances between market p and the D curve

37
Q

Define producer surplus

A

The difference between the min p producers would be willing to sell at and the p they actually receive

38
Q

Define total welfare

A

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

microeconomics (10 decks)

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