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
What are the roles of prices?
Prices are signals that convey all information needed for buyers and sellers. By signalling what is relatively scarce and what is abundant: price channels production and consumption
Prices ration scarce resources, those who are willing and able to purchase
Prices determine (seller’s) income, income depends on the supply and demand of the services you (as a seller) can sell
Diagram to show a substitute becoming cheaper to produce
Diagram to show complememnts becoming more expensive
Explain what will happen due to the following to the equilibrium price and equilbrum qunatity
Explain what will happen due to the following to the equilibrium price and equilbrum qunatity
Summary notes for market quilibrium lecture
Diagram to show different elasticities of demand
What are the dtereminants of the price elasticity of demand?
Availability of close substitues
Necessities vs luxuries
Definition of market (market demand vs firm demand)
Time horizon
How is the availability of close substitues a determinant of PED?
Goods with close substitutes tend to have more elastic demands
● if there is a small price increase, buyers will switch to the alternatives
How do necessities vs luxuries determine the PED?
Goods that are essential tend to have less elastic demand
● if price rises for an essential good, buyers have not many other choices and will continue to buy it
● Eg. Necessities: tooth paste; Luxuries: Hermes bags
How doe sht edefinition of the market affect PED?
Narrowly defined markets have more elastic demand than broadly defined markets ● it is easier to find substitutes for a narrowly defined market
● Eg. Phone market vs Smart phone market vs Android phone market
How does the time horizon affect the PED?
Demand is more elastic when the associated time period is longer
● it is easier to substitute away from a product in the long run than in the short run
What is the equation for the price elasticity of demand?
What is perfectly elastic demand?
any increase in price reduces the quantity demanded to zero
What is perfectly inelastic demand?
any increase in price has no effect on the quantity demanded
Diagram to show both perfectly elastic and perfectly inelastic demand
What is a giffen good?
A Giffen good is a low income, non-luxury product that defies standard economic and consumer demand theory. Demand for Giffen goods rises when the price rises and falls when the price falls. In econometrics, this results in an upward-sloping demand curve, contrary to the fundamental laws of demandwhich create a downward sloping demand curve.
What type of goods break the law of demand?
Giffen goods
What does a negative PED show?
Giffen goods
What does a PED of less than 1 and more than 0 show?
Inelastic demand- quantity demanded changes proportionally less than price
What does a PED of more than 1 show?
Quantity demanded changes proportionally more than price
How do we caluclate PED from a grpah? I
-Different answers for increases and decreases in price
Calculate the elascticity using the midpoint method
Describe the elasticity along the demand curve?
Can vary
What is total expenditure and what does it depend on?
Total expenditure is how much is spent by buyers on a good: unit price x amount bought
This depends on the PED
Diagram to show how total expenditure depends on PED
What is income elasticity?
A measure of how responsive the equantity demanded is to a change in income
What does an IED of less than one show?
Inferior goods
What is an inferior good?
QD decreases with a rise in income, e.g. buses
What are normal goods?
Necessities and luxuries
What are the two types of normal goods?
Necesities and luxuries
What does an income elasticity of between 0 and 1 show?
Necessity- demand increases less rapidly than an increase in income
What does an income elasticity greater than 1 show?
Luxuries- demand increases more rapidly than an increase in income
What is the cross-price elasticity of demand?
A measure of how much the quantity demanded of one good changes if the price of another good changes
What does the sign of the CED / XED tell us?
Whether products are alternatives to each other or whether they are bough together.
Negative = complement
Positive = Substitute
What does a positive XED incidcate?
Substitutes
What does a negative XED show?
Complements
What is a substitue?
Alternative
For substitutes:
Cross-price elasticity of demand is positive
i.e. Buyers purchase more of good A when the price of good B rises
What is a complement?
Bought together
● For complements:
Cross-price elasticity of demand is negative
i.e. Buyers purchase less of good A when the price of good B rises
What is the price elasticity of supply?
A measure of the responsiveness of quantity supplied to price
Graph to show the price elasticity of supply
Summary notes for elasticity lecture
What is one of the reasons that governemtns intervene in the market?
Governments often intervene in an attempt to make society ‘fairer’
Give 2 examples of governement policies and what they are
Price controls: keep prices low or keep them high
Indirect taxes: raise revenue that can be redistributed
What is a price ceiling?
A price ceiling prevents the price in the market from rising above a certain level, as they can be deemed ‘too high’ by governments and policy makers. A price celiing above the market equilibrium level has no effect
Price celining diagram
When does a price celing have no effect?
If the level is above the market equilibrium
What does a binding price ceiling do?
Lowers the market price but it causes excess demand
Describe the social hosuing ciris in Berlin
Berlin - social housing and rent control fails after a year.
5 year rent caps introduced in February 2020 due to unrest over unaffordable rents.
Found that rents in newly unregulated markets of flats built before 2014 have declined by 11% compared with the still-unregulated market for newer buildings.
However the city’s issue of a housing shortage has become worse as the number of classified ads for rentals has fallen by more than half
Describe housing in Singapore
Singapore has one of the highest rates of home ownership in the World, more than 80% of the population live in government built flats. Housing Development Board set up in 1960 to accommodate an influx of immigrants- 1964 began subsidised flat selling.
Diagram to show how the givernment could influence the housing crisis positively
Diagram to show excess demand/housing shortage from a price ceiliing
What is a price floor?
A price floor prevents the price in the market from falling below a certain level
Diagram to show a price floor
What is a binding price floor?
Raises the market price but causes excess supply
When does a price floor have no effect?
When the level is below the market equilibrium price
Daigaram to show the effect of minimum wage in the labour market
What is minimum wage?
Legislation which ensures people recieve reasonable incomes, a market floor. It is commonly argued that the minimum wage causes unemployment- however this depends upon the elasticity of demand and supply.
What does minimum wage have no effect on?
The wage of high skilled workers
How does a binding minimum wage also affect the factor market? Use a graph
It increases the costs for firms who demand low skilled workers
What is the incidence of tax?
The distribution of on buyers and sellers
Diagram to show the affect of imposing taxes on goods
Diagram to show who pays the tax between the buyers and sellers
Diagram to show how the effect of imposing taxes on goods varies
What does the incidence of tax depend on?
The elasticity of demand and supply
US case study and diagram of luxury taxes
Summary notes for government policy lecture
