Topic 3: Demand and Supply Flashcards
define demand
the Q of a G or S that consumers are will and able to buy at various price levels at a given point in time (demand of all consumers = market demand)
what are the factors that affect demand?
- The price of the G or S itself
- The price of other G&S
- Expected future prices
- Changes in consumer taste and preferences
- The level of income
- The size of the population and age distribution
how does the price of the G or S affect D?
Consumers must consider whether or not a product is worth buying at the price it is selling for. However, if a product is a necessity than consumers will buy it, even if it is considered expensive, since they need it.
how does the price of other G&S affect D?
There are substitute items and complementary items
If the P of a substitute G increases then the D for the original G will increase (assuming that its P stays the same)
If the P of a complementary G increases then the D for the original G with decrease (assuming that that its P stays the same)
how does expected future prices affect D?
If consumers expect that the prices of smth will increase in the future, then they will increase their current demand
how does changes in consumer taste affect D?
As consumer tastes change over time, so will the D of certain G&S
how does the level of income affect consumer taste?
As people earn higher incomes, they will increase their D since they can afford more/more expensive things (luxury G)
income distribution impacts D aswell
consumer expectations of their future income will also impact D because if they think that their income will decrease then they may be hesitant to buy and instead, save their money for the future
define income distribution
the way in which an economy’s income is spread among members of different social and socioeconomic groups
how does the size and age of the population affect D?
population affects the amount of G demanded
age affects the type of G demanded
define ceteris paribus
an assumption used in economics to isolate the relationship between two economic variables. “other things being equal”, “nothing else changes”
what is the demand schedule?
shows the Q of G that will be demanded over a range of prices - demonstrates the relationship between P and Q demanded.
state the law of demand
The D of consumers fall as prices rise.
what are the movements along the demand curve?
EXPANSION AND CONTRACTION
expansion of D: when a decrease in P of a G or S increases D (moves down the D curve)
contraction of D: when an increase in P of a G or S decreases D (moves up the D curve)
what does does it mean when the D curve moves to the right?
This means that D has increased
Furthermore, consumers are willing and able to buy more of the product at each possible price than before and willing to buy the same Q at a more expensive price
what does it mean when the D curve moves to the left?
This means that D has decreased
Furthermore, consumers are willing and able to buy less of the product at each possible price than before and willing to buy the same Q at a lower price
define price elasticity of demand
the responsiveness or sensitivity of the Q demanded of a product, given that its price has changed
difference between elastic, inelastic, and unit elastic demand
Elastic: a strong response to a change in price
unit: a proportionate response to a change in price (total amount spent by consumers hasnt changed)
inelastic: a weak response to a change in price
What is the importance of P elasticity?
being aware of the price elasticity of D helps determine the best pricing strategy for firms and gov (whether or not they should change prices)
what is the ‘total outlay method’?
it is a way to calculate the price elasticity of D by looking at the effect of changes in price has on revenue earned by the producer.
If P and R move in the same direction than D is inelastic
If P and R move in opposite directions than D is elastic
If R remains unchanged in response to a P change, than D is unit elastic
how do you calculate the total outlay?
multiply the P by the Q demanded at said P
define perfectly elastic and inelastic demand
perfectly elastic D: (horizontal line) consumers are only willing to pay one price and any given quantity
perfectly elastic D: (vertical line) consumers are willing to pay any price for a single given quantity
What are the factors that affect the elasticity of demand?
- whether the G is a luxury or a necessity
- whether the G has any close substitutes
- the expenditure on the product as a proportion of income
- the length of time subsequent to a P change
- whether a G is addictive or not
impact of ‘whether the G is a luxury or necessity’
necessities have relatively inelastic D because people are willing to buy it even if the P increases since they NEED it
luxuries have higher elastic D because consumer are willing not to buy it even if P increases because they DONT NEED it
impact of ‘close substitutes’
G WITH CLOSE SUBS will have elastic D because consumers arent committed to a particular product. This means that if the P for a G increases, consumers will demand less of that product and instead, purchase the sub (assuming that its P stayed the same)
G WITHOUT CLOSE SUBS will have inelastic D because consumers are very committed to that particular product. This means that even if the P changes, consumers will still buy it since there are not other subs for them to buy instead.
impact of ‘expenditure on the product as a proportion of income’
the bigger the proportion of income G&S takes up, the more elastic its D will be.
impact of ‘length of time subsequent to price change’
What the P of a certain product changes, there may not be immediate changes in D as consumers still need to become aware of and adjust to the change.im
impact of ‘whether a G is addicting or not’
G that are addictive have relatively inelastic D since consumer would still buy it even if it became more expensive due to their addiction
define supply
the Q of a G or S that all firms in a particular industry are willing and able to offer for sale at different P levels, at any given point in time.
What are the factors affecting mkt Supply?
- The P of the G or S itself
- The P of other G or S
- The state of technology
- Changes in the cost of factors of prod’n
- The Q of the G available
- Climatic and Seasonal changes
How does the P of the G or S itself impact mkt S?
it will influence the producers ability and willingness to supply it
eg. if the P was too low, producers would not supply it since the P would be too low to cover their costs of prod’n
How does the P of other G&S impact mkt S?
firms will be more willing to supply G that sell products that are more profitable
How does the state of technology impact mkt S?
improvements in tech lower prod’n cost and allow firms to supply more G
How does changes in the cost of factors of prod’n impact mkt S?
any fall in the cost of factors of prod’n will allow firms to increase their S of a particular G whereas any rise would make it more difficult for firms to maintain their current supply.
How does the Q of the G available impact mkt S?
it is a limiting factor that affects supply
How does climatic and seasonal influences impact mkt S?
it impacts agricultural prod’n (which is part of Land - natural resources - a factor of prod’n)
What is a supply schedule?
a visual representation of the Q of a G that will be supplied over a range of P, at any given point in time
what is the law of supply?
As prices increases, supply increases
What are the two movements ALONG the supply curve?
expansion of S: an increase in the P of G&S causes an increase in Q supplied (upward movement along S curve)
contraction of S: a decrease in P of G&S causes a decrease in Q supplied (downward movement along S curve)
an increase in S moves the S curve in what way?
to the right
a decrease in S moves the S curve in what way?
to the left
What does it mean when there is an increase in S?
firms are willing to supply MORE at each P level than before.
firms are willing to supply a given Q at a LOWER P than before.
What does it mean when there is a decrease in S?
firms are willing to supply LESS at each P level than before.
firms are willing to supply a given Q at a HIGHER P than before.
define price elasticity of S
the RESPONSIVENESS of Q supplied to a change in P.
How is the price elasticity of S calculated?
% change in Q supplied divided by the % change in P
define perfectly elastic S
producers are willing to produce any Q of a G or S for a single given P
represented as a horizontal line
define perfectly inelastic S
producers are willing to supply a given Q for any Price
represented as a vertical line
what are the factors that affect the P elasticity of S?
- time lags after a P change
- the ability to hold and store stock
- excess capacity
how does time lags after a P change impact the P elasticity of S?
the amount of time producers have to respond to a P change, the more elastic the S for the product in question.
in the short run, P elasticity of S increases (likely to be still relatively inelastic)
in the long run, it will be easier for producers to increase any of the inputs and facilitate a greater increase in prod’n in response to a P change - making supply relatively elastic.
how does the ability to hold and store stock impact the P elasticity of S?
The easier it is to hold stock, the more elastic the S.
the more inventory, the more elastic the S
define inventory
the total stock of G and S held by a firm at a particular point in time, which is intended for sale to costumers
how does excess capacity impact the P elasticity of S?
S will be elastic when firms have excess capacity since they can respond quickly to P changes by using their existing resources more intensively
S will be inelastic when firms are already using their resources at full capacity
What is the price mechanism?
the process by which the forces of D and S interact to determine the mkt P at which G&S are sold and the Q produced
What is Market equilibrium?
The situation where the Q supplied and the Q demanded are equal at a certain P level (meaning that the mkt clears)
Where is equilibrium on a graph?
where the D and S curve intersect
What happens when there is too much D and not enough S?
There will be competition among buyers for the limited amount of G, causing the P to increase. An increase in P causes an expansion in S and a contraction. This will continue until we eventually reach the intersection of the S and D curves (equilibrium or mkt-clearing P)
What happens then there is too much S and not enough D?
In order to remove excess S, sellers will offer the G&S at a lower P. The fall in P will decrease S and increase D. This causes a contraction in S and an expansion in D. This will continue until we eventually reach the intersection of the S and D curves (equilibrium or mkt-clearing P)
How does an increase D change equilibrium?
An increase in D raises both EP and EQ
How does a decrease in D change equilibrium?
A decrease in D decreases both EP and EQ
How does an increase in S change equilibrium?
An increase in S lowers EP and raises EQ
How does a decrease in S change equilibrium?
A decrease in S raises EP and lowers EQ
define product market
is the interaction of D for and S of the outputs of prod’n
define factor market
a mkt for any input into the prod’n process, including land, labour, capital, and enterprise
define allocative efficiency
allocative efficiency refers to the economy’s ability to allocate resources to satisfy consumers want
What is mkt failure?
occurs when the P mechanism takes into account private benefits and costs of prod’n to consumers and producers, but it fails to take into account indirect costs such as damage to the environment
What is the purpose of a price ceiling?
The gov imposes the maximum price that can be charged for a particular commodity so that there is disequilibrium, with excess demand
What is the purpose of a price floor?
The gov imposes the minimum price that can be charged for a particular commodity so that there is disequilibrium, with excess supply
What does ‘internalising the externality’ mean?
When the government makes individual businesses pay for their social costs created by prod’n
define merit goods
goods that are not produced in sufficient Q by the private sector because private individuals do not place enough value on those G
(they involve positive externalities that are not fully enjoyed by the individual consumer, eg. education and healthcare)
define public goods
G that private firms are unwilling to supply since they are unable to determine who gets to benefit from those goods even if individuals didn’t pay for them
What does the gov do when the mkt P is too high and how does it help?
price ceiling - reduces price and creates a shortage in Q [disequilibrium]
What does the gov do when the mkt P is too low and how does it help?
price floor - increases price and created an excess in Q [disequilibrium]
What does the gov do when mkt Q is too high and how does it help? [negative externalities]
taxes - increases EQ P and reduces EQ Q
What does the gov do when mkt Q is too low and how does it help?
[positive externalities]
subsidies - reduces EQ P and increases EQ Q
What does the gov do when the mkt does not provide G or S?
The gov provides the G or S by collecting taxation revenue to finance its supply of public G
