Topic 1 Supply and demand Flashcards

1
Q

What is demand?

A

Demand is how much buyers can and want to purchase of a good or service

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2
Q

What is supply?

A

Supply is how much sellers can and want to produce of a good or service

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3
Q

Who are the buyers and sellers in product markets?

A

In product markets- buyers= individuals and sellers =firms

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4
Q

Who are the buyers and sellers in factor markets?

A

In factor markets- buyers= firms and sellers= individuals

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5
Q

What is the equation for profit?

A

Profit (π) = TR- TC= price X quantity - Total costs

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6
Q

What do firms seek to do and what influence do they have in markets?

A

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

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7
Q

What do individuals seek to do?

A

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.

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8
Q

What does utility determine?

A

The utility determines their maximum willingness to buy. Consumers buy the product if the price is below their maximum willingness to pay.

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9
Q

What is demand?

A

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).

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10
Q

What is demand expressed as?

A

A time period

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11
Q

What happens to QD when price increases and why?

A

QD tends to fall as price increases, due to the income effect and the substitution effect

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12
Q

What is the income effect?

A

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.

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13
Q

What is the substition affect?

A

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.

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14
Q

What is the law of demand?

A

Quanitity demanded increases as the price decreases

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15
Q

What does a change in price cause with regards to the demand curve?

A

Change in price= movement along

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16
Q

What does the deamnd curve show?

A

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

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17
Q

Diagram to show shifts in demand

A
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18
Q

What causes shifts in the demand curve?

A

Income

Prices of related goods

Tastes

Number of buyers

Expectations of the future

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19
Q

How does income affect the quantity demanded?

A

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

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20
Q

How does the price of related goods affect the demand curve?

A

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

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21
Q

How do tastes affect the demand curve?

A

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)

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22
Q

How do the number of buyers affect the demand curve?

A

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

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23
Q

How do expectations of the future affect the demand cruve?

A

Expectations of the future: demand will shift according to expectations of the future, important factors include: future income, prices and supply

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24
Q

What does the supply curve show?

A

The relationship between the quantity supplied and price, in ceteris paribus

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25
Q

Show a diagram of shifts in supply

A
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26
Q

What ause shifts in supply?

A

Input rices

Technology

Random shocks

Number of sellers

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27
Q

How do input prices affect supply?

A

Input prices: increases costs= minimum price willing to accept increases; shift to the left

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28
Q

How does tchnology affect supply?

A

Technology: increased efficiency, rightwards shift

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29
Q

How do random shocks affect supply?

A

Random shocks: Unpredictable shortages, shift to the left, at a given price sellers can supply less than before

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30
Q

How do the number of sellers affect supply?

A

Number of sellers: Supply likely to shift to the right when there are more sellers, more is produced at any given price

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31
Q

Summary notes for the supply and demand lecture

A

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

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32
Q

When does the market clear?

A

When there is no excess demand or excess supply

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33
Q

Diagram to show excess demand and excess supply

A
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34
Q

When is there excess supply?

A

There is excess supply when QS>DQ

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35
Q

When is there excess demand?

A

There is excess demand when QD>QS

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36
Q

What is equilbirum?

A

Equilibrium is at a point where there is no incentive to change behaviour, the market is in equilibrium when it clears.

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37
Q

Explain the law of price adjustment

A

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

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38
Q

Why will prices fall when supply exceeds demand?

A

Prices are too high, sellers not selling as much as they would like- thus incentive to cut prices

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39
Q

Why will prices rise when demand exceeds supply?

A

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

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40
Q

What is a consumer surplus?

A

Consumer surplus is the difference between the price that consumers pay and the price they are willing to pay

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41
Q

What is a producer surplus?

A

Producer surplus is the difference between the price producers sell at and the price they are willing and able to sell at

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42
Q

Show a diagram of producer and consumer surpluses

A
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43
Q

Diagram to show an increase in demand due to an increase in income

A
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44
Q

Diagram to show an increase in supply due to an improvement in technology

A
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45
Q

What are the roles of prices?

A

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

46
Q

Diagram to show a substitute becoming cheaper to produce

A
47
Q

Diagram to show complememnts becoming more expensive

A
48
Q

Explain what will happen due to the following to the equilibrium price and equilbrum qunatity

A
49
Q

Explain what will happen due to the following to the equilibrium price and equilbrum qunatity

A
50
Q

Summary notes for market quilibrium lecture

A
51
Q

Diagram to show different elasticities of demand

A
52
Q

What are the dtereminants of the price elasticity of demand?

A

Availability of close substitues

Necessities vs luxuries

Definition of market (market demand vs firm demand)

Time horizon

53
Q

How is the availability of close substitues a determinant of PED?

A

Goods with close substitutes tend to have more elastic demands

● if there is a small price increase, buyers will switch to the alternatives

54
Q

How do necessities vs luxuries determine the PED?

A

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

55
Q

How doe sht edefinition of the market affect PED?

A

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

56
Q

How does the time horizon affect the PED?

A

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

57
Q

What is the equation for the price elasticity of demand?

A
58
Q

What is perfectly elastic demand?

A

any increase in price reduces the quantity demanded to zero

59
Q

What is perfectly inelastic demand?

A

any increase in price has no effect on the quantity demanded

60
Q

Diagram to show both perfectly elastic and perfectly inelastic demand

A
61
Q

What is a giffen good?

A

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.

62
Q

What type of goods break the law of demand?

A

Giffen goods

63
Q

What does a negative PED show?

A

Giffen goods

64
Q

What does a PED of less than 1 and more than 0 show?

A

Inelastic demand- quantity demanded changes proportionally less than price

65
Q

What does a PED of more than 1 show?

A

Quantity demanded changes proportionally more than price

66
Q

How do we caluclate PED from a grpah? I

A

-Different answers for increases and decreases in price

67
Q

Calculate the elascticity using the midpoint method

A
68
Q

Describe the elasticity along the demand curve?

A

Can vary

69
Q

What is total expenditure and what does it depend on?

A

Total expenditure is how much is spent by buyers on a good: unit price x amount bought

This depends on the PED

70
Q

Diagram to show how total expenditure depends on PED

A
71
Q

What is income elasticity?

A

A measure of how responsive the equantity demanded is to a change in income

72
Q

What does an IED of less than one show?

A

Inferior goods

73
Q

What is an inferior good?

A

QD decreases with a rise in income, e.g. buses

74
Q

What are normal goods?

A

Necessities and luxuries

75
Q

What are the two types of normal goods?

A

Necesities and luxuries

76
Q

What does an income elasticity of between 0 and 1 show?

A

Necessity- demand increases less rapidly than an increase in income

77
Q

What does an income elasticity greater than 1 show?

A

Luxuries- demand increases more rapidly than an increase in income

78
Q

What is the cross-price elasticity of demand?

A

A measure of how much the quantity demanded of one good changes if the price of another good changes

79
Q

What does the sign of the CED / XED tell us?

A

Whether products are alternatives to each other or whether they are bough together.

Negative = complement

Positive = Substitute

80
Q

What does a positive XED incidcate?

A

Substitutes

81
Q

What does a negative XED show?

A

Complements

82
Q

What is a substitue?

A

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

83
Q

What is a complement?

A

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

84
Q

What is the price elasticity of supply?

A

A measure of the responsiveness of quantity supplied to price

85
Q

Graph to show the price elasticity of supply

A
86
Q

Summary notes for elasticity lecture

A
87
Q

What is one of the reasons that governemtns intervene in the market?

A

Governments often intervene in an attempt to make society ‘fairer’

88
Q

Give 2 examples of governement policies and what they are

A

Price controls: keep prices low or keep them high

Indirect taxes: raise revenue that can be redistributed

89
Q

What is a price ceiling?

A

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

90
Q

Price celining diagram

A
91
Q

When does a price celing have no effect?

A

If the level is above the market equilibrium

92
Q

What does a binding price ceiling do?

A

Lowers the market price but it causes excess demand

93
Q

Describe the social hosuing ciris in Berlin

A

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

94
Q

Describe housing in Singapore

A

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.

95
Q

Diagram to show how the givernment could influence the housing crisis positively

A
96
Q

Diagram to show excess demand/housing shortage from a price ceiliing

A
97
Q

What is a price floor?

A

A price floor prevents the price in the market from falling below a certain level

98
Q

Diagram to show a price floor

A
99
Q

What is a binding price floor?

A

Raises the market price but causes excess supply

100
Q

When does a price floor have no effect?

A

When the level is below the market equilibrium price

101
Q

Daigaram to show the effect of minimum wage in the labour market

A
102
Q

What is minimum wage?

A

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.

103
Q

What does minimum wage have no effect on?

A

The wage of high skilled workers

104
Q

How does a binding minimum wage also affect the factor market? Use a graph

A

It increases the costs for firms who demand low skilled workers

105
Q

What is the incidence of tax?

A

The distribution of on buyers and sellers

106
Q

Diagram to show the affect of imposing taxes on goods

A
107
Q

Diagram to show who pays the tax between the buyers and sellers

A
108
Q

Diagram to show how the effect of imposing taxes on goods varies

A
109
Q

What does the incidence of tax depend on?

A

The elasticity of demand and supply

110
Q

US case study and diagram of luxury taxes

A
111
Q

Summary notes for government policy lecture

A
112
Q
A