Topic 1 Supply and demand Flashcards
What is demand?
Demand is how much buyers can and want to purchase of a good or service
What is supply?
Supply is how much sellers can and want to produce of a good or service
Who are the buyers and sellers in product markets?
In product markets- buyers= individuals and sellers =firms
Who are the buyers and sellers in factor markets?
In factor markets- buyers= firms and sellers= individuals
What is the equation for profit?
Profit (π) = TR- TC= price X quantity - Total costs
What do firms seek to do and what influence do they have in markets?
Firms aim to profit maximise and have no ability to influence the market, they are price takers. Profit (π) = TR- TC= price X quantity - Total costs
What do individuals seek to do?
Individuals seek to maximise utility which they gain from consuming goods and services. The utility determines their maximum willingness to buy. Consumers buy the product if the price is below their maximum willingness to pay.
What does utility determine?
The utility determines their maximum willingness to buy. Consumers buy the product if the price is below their maximum willingness to pay.
What is demand?
The amount of a product that consumers wish to purchase at a given price is: quantity demanded (this is not the amount actually purchased, just desired).
What is demand expressed as?
A time period
What happens to QD when price increases and why?
QD tends to fall as price increases, due to the income effect and the substitution effect
What is the income effect?
The income effect is a change in the demand for a good or service due to a change in a consumer’s purchasing power, which is, in turn, due to a change in their real income.
What is the substition affect?
The substitution effect is the decrease in sales for a product that can be attributed to consumers switching to cheaper alternatives when its price rises. The substitution effect is strongest for products that are close substitutes.
What is the law of demand?
Quanitity demanded increases as the price decreases
What does a change in price cause with regards to the demand curve?
Change in price= movement along
What does the deamnd curve show?
Demand curve shows the relationship between QD and price, in ceteris paribus
Shows maximum prices which buyers are willing to pay at for this unit of product
Diagram to show shifts in demand
What causes shifts in the demand curve?
Income
Prices of related goods
Tastes
Number of buyers
Expectations of the future
How does income affect the quantity demanded?
Demand is likely to shift to the right when income rises, and to the left when incomes fall
The more affluent people are, the more willing they are to pay due to disposable income
How does the price of related goods affect the demand curve?
Substitutes: demand shifts to the right when the price of a substitute increases, and to the left when it decreases
Demand increases: people will switch away from the more expensive alternative
Complements: demand shifts to the left when the price of a complement increases and to the right when it decreases
Demand decreases, people stop purchasing the complement
How do tastes affect the demand curve?
Tastes: when products become more desirable, demand shifts to the right, people are willing to pay more for more desirable goods/services. (consider advertisement and trends)
How do the number of buyers affect the demand curve?
Number of buyers: Demand shifts to the right when there are a greater number of buyers- more people are willing to buy at a given price point. It shifts to the left when there are fewer buyers, less people are willing to buy at a given price point
How do expectations of the future affect the demand cruve?
Expectations of the future: demand will shift according to expectations of the future, important factors include: future income, prices and supply
What does the supply curve show?
The relationship between the quantity supplied and price, in ceteris paribus
Show a diagram of shifts in supply
What ause shifts in supply?
Input rices
Technology
Random shocks
Number of sellers
How do input prices affect supply?
Input prices: increases costs= minimum price willing to accept increases; shift to the left
How does tchnology affect supply?
Technology: increased efficiency, rightwards shift
How do random shocks affect supply?
Random shocks: Unpredictable shortages, shift to the left, at a given price sellers can supply less than before
How do the number of sellers affect supply?
Number of sellers: Supply likely to shift to the right when there are more sellers, more is produced at any given price
Summary notes for the supply and demand lecture
Summary
The law of demand: quantity demanded decreases as price rises
Demand curve: the relationship between quantity demanded, and price, ceteris paribus
Other important factors: cause shifts in the demand curve
The law of supply: quantity supplied increases as price rises
Supply curve: the relationship between quantity supplied and price, ceteris paribus
Other important factors: cause shifts in the supply curve
When does the market clear?
When there is no excess demand or excess supply
Diagram to show excess demand and excess supply
When is there excess supply?
There is excess supply when QS>DQ
When is there excess demand?
There is excess demand when QD>QS
What is equilbirum?
Equilibrium is at a point where there is no incentive to change behaviour, the market is in equilibrium when it clears.
Explain the law of price adjustment
When supply exceeds demand, price will fall
Prices are too high, sellers not selling as much as they would like- thus incentive to cut prices
When demand exceeds supply, the price will rise
Prices are too low, buyers are frustrated as they cannot buy as much as they would like due to shortages, thus an incentive to raise prices
Why will prices fall when supply exceeds demand?
Prices are too high, sellers not selling as much as they would like- thus incentive to cut prices
Why will prices rise when demand exceeds supply?
Prices are too low, buyers are frustrated as they cannot buy as much as they would like due to shortages, thus an incentive to raise prices
What is a consumer surplus?
Consumer surplus is the difference between the price that consumers pay and the price they are willing to pay
What is a producer surplus?
Producer surplus is the difference between the price producers sell at and the price they are willing and able to sell at
Show a diagram of producer and consumer surpluses
Diagram to show an increase in demand due to an increase in income
Diagram to show an increase in supply due to an improvement in technology