UNIT 5: DEMAND AND SUPPLY Flashcards
Definitions of demand, quantity demanded:
- Demand refers to all possible quantities that the buyers are willing and able to buy at all possible prices.
- QD refers to a specific quantity of a good that buyers are willing and able to buy at a specific price.
Definitions of supply, quantity supply:
- Supply refers to all possible quantities of a good that the sellers are willing and able to sell at all possible prices.
- QS refers to a specific quantity of a good that the sellers are willing and able to sell at a specific price.
When is a market in equilibrium?
When the demand curve meets the supply curve at the same point.
How does the price of a good influence its quantity demanded?
When shift factors are held constant, if the price of a good increases, its quantity demanded will decrease, and vice versa. Price and quantity demanded of a good are negatively related.
How does the price of a good influence its quantity supplied?
When shift factors are held constant, if the price of a good increases, its quantity supplied will increase. Price and quantity supplied of a good a positively related.
How does the demand/supply of a good influence its prices?
When other things (shift factors) are held constant:
- If demand of a good increases, its price will increase.
- If supply of a good increases, its price will decrease.
Definition of Law of demand:
Law of demand describes how price influences buyer behavior. If the price of a specific good or service increases. the quantity a buyer will purchase tend to decrease. If the price decreases, the quantity a buyer will purchase tend to increase.
Definition of Law of Supply:
The seller will be influenced by prices when deciding how much to provide or produce. But for the seller, as the price of a good or service rises, the quantity supplied will increased. As price decreases, the seller will produce less & the quantity supplied will decrease.
The influence of shift factors:
A change in one of shift factors can make the whole demand curve/supply curve shift to the right or to the left.
Example for shift factors:
- Income
- Inflation
- Economic policies: taxes, G’s spending, discount rates, etc.
- Technology
- Advertising campaign
- Expectation of sellers/buyers
- And so on.
For example, if people have more incomes, they tend to spend more on goods and services. Illustrated on the graph, the whole demand curve shifts to the right.
If the G increases income tax rates, households and firms have less incomes to spend, the whole demand curve will shift to the left.
SUMMARY
There are some main ideas in Unit 5: relations between demand & supply of a goods and its prices.
Firstly, when shift factors are held constant, if price of a good increases, its quantity demanded reduces and its quantity supplied increases. If demand of a good increases, its price tends to increase. If supply of a good increases, its price tends to reduce.
Secondly, a change in one of shift factors may cause the whole demand curve/supply curve shift to the right or to the left.
Finally, equilibrium point is the point at which the demand curve and supply curve meet each other.