Week 2 Flashcards
What is CONSUMER SOVIERNITY?
Where in a market system, consumers ultimately determine which goods/services will be produced.
What is a DEMAND SCHEDULE?
A table that shows the relationship between PRICE and QUANTITY
What is a DEMAND CURVE?
A graph / curve that shows the relationship between PRICE and QUANTITY
What direction does DEMAND CURVE have? Why?
Downwards slope, from top left to bottom right.
Because consumers will buy more when price low
What is QUANTITY DEMANDED?
The amount of a good/service that a consumer is willing and able to purchase at a given price.
What is MARKET DEMAND?
The demand by all consumers for a given good/service.
Illustrated by the Demand Curve
What is LAW OF DEMAND?
Holding everything else constant, when PRICE FALLS the QUANTITY DEMANDED INCREASES and vice versa.
What is the only focus when constructing a DEMAND CURVE?
The effect that PRICE CHANGES have on QUANTITY that a consumer is willing and able to purchase - all other variables held constant
What does CETERIS PARIBUS mean?
All being equal - it is the req’ment that when analysing the relationship between two variables other variables must be held constant
What is the SUBSITUTION EFFECT?
The change in the quantity demanded of a product that results from a change in price that makes the produce more/les expensive relative to substitute product.
Change in price of substitute product causes consumers to purchase more/less of a product.
What is the INCOME EFFECT?
The change in the quantity demanded of a product that results from the effect of a change in price on consumer purchasing power?
What is PURCHASING POWER?
The quantity demanded of products that can be bought with a fixed amount of income.
What happens to PURCHASING POWER when price of good falls?
Purchasing power increases - consumers willing / able to purchases a larger quantity.
What happens if other variable (NOT price) changes?
Consumers change the quantity they demand at every price.
Demand curve shifts left/right
If demand increases due to a variable other than price, does the demand curve shift left or right?
INCREASE = RIGHT
If demand deceases due to a variable other than price, does the demand curve shift left or right?
DECREASE = LEFT
What variables (other than price) affect market demand?
Income Price of related goods Tastes Population/Demographics Expected Future Prices
Why does INCOME affect market demand?
Cos it affects consumers’ willingness and ability to buy a good
What is a NORMAL GOOD?
Most goods!
… demand increases following an increase in income
… demand decreases following a decrease in income
but demand for some goods fall when income rises
What is an INFERIOR GOOD?
… demand increases following a decrease in income
… demand decreases following an increase in income
Why does the PRICE OF RELATED GOODS affect market demand?
Cos the price of other goods can also affect consumers’ demand for a product.
What are SUBSTITUTES?
Goods/services that can be used for the same/similar purpose
What happens to the demand curve when the price of a substitute decreases?
Demand for (first) good shift left.
What happens to the demand curve when the price of a substitute increases?
Demand for (first) good shift right.
What are COMPLEMENTS?
Products that are used together - when 2 products are complements, the more you use of one the more you use of the other.
What happens to the demand curve when the price of a complement decreases?
Demand for (first) good shift right.
What happens to the demand curve when the price of a complement increases?
Demand for (first) good shift left.
Why does TASTE affect market demand?
Consumers are influenced by tastes; ad campaigns can affect consumers’ taste.
What is TASTE?
A broad category refers to many subjective elements that can enter a consumers’ decision to buy.
Change tastes occur for a variety of reasons:
- trends/fashions
- seasonal change
What happens when consumer taste for a product increases?
Demand curve shifts right.
Why does POPULATION/DEMOGRAPHICS affect market demand?
Because as the population increases/decreases, the demand for most products will increase/decrease.
What are DEMOGRAPHICS?
The characteristics of a population eg. age, race, gender
Why does EXPECTED FUTURE PRICES affect market demand?
Cos consumers choose WHICH products to buy WHEN - and this is influenced by perception whether prices will increase/decrease in future
What is CHANGE IN DEMAND?
Refers to a shift OF the demand curve.
Occurs if there is a change in one of the variables (but not price) that affects the willingness of consumers to buy the product.
What is CHANGE IN QUANTITY DEMAND?
Refers to a movement ALONG the demand curve.
Occurs if there is a change in price
What happens to the demand for a NORMAL GOOD if income increases?
Demand Curve moves RIGHT
Consumers spend MORE of their INCOME on the good
What happens to the demand for an INFERIOR GOOD if income increases
Demand Curve moves LEFT
Consumers spend LESS of their INCOME on the good
What happens to the demand if PRICE of a SUBSTITUTE GOOD increases?
Demand Curve moves RIGHT
Consumers buy LESS of SUBSTITUTE GOOD, and MORE of FIRST PRODUCT
What happens to the demand if PRICE of COMPLEMENTARY GOOD increases?
Demand Curve moves LEFT
Consumers buy LESS of COMPLEMENTARY GOOD and LESS of FIRST PRODUCT
What happens to the demand if TASTES for goods increases?
Demand Curve moves RIGHT
Consumers willing to buy MORE at every price
What happens to the demand if the POPULATION increases?
Demand Curve moves RIGHT
ADDITIONAL CONSUMERS mean MORE DEMAND at every price
What happens to the demand if the FUTURE PRICE expected to increases?
Demand Curve moves RIGHT
Consumers buy MORE NOW to avoid later higher prices
What is QUANTITY SUPPLIED?
The amount of good/service that a firm is willing and able to supply at a given price
What is the LAW OF SUPPLY?
Holding everything constant, when price of good increases, the quantity supplied increases (cos good more profitable)
What is SUPPLY SCHEDULE?
A table that shows the relationship between PRICE and QUANTITY
What is SUPPLY CURVE?
A graph/curve that shows the relationship between PRICE and QUANTITY
What is MARKET SUPPLY?
The supply by all firms of a given good/service
What direction does SUPPLY CURVE have? Why?
Upwards slope, from bottom left to top right.
Because firms will sell less when price low
If at every price firms increase quantity they wish to sell, what direction does supply curve move?
RIGHT
If at every price firms decrease quantity they wish to sell, what direction does supply curve move?
LEFT
What variables affect market supply?
Price of inputs Technological changes Prices of substitutes Number of firms in market Expected future prices
How does the PRICE OF INPUTS affect the supply curve?
Cos an input is anything used in production of good/service.
If price of component increases
- cost of producing good increases
- good becomes less profitable
- supply of good will decline
- market supply curve will shift left.
What is TECHNOLOGICAL CHANGE?
A change in the ability of the firm to produce output with a given quantity of inputs
… incurs when a firm is able to produce MORE output using the same amount of inputs, causing increase in PRODUCTIVITY
What is PRODUCTIVITY?
The output produced per unit of input
What are SUBSTITUTES IN PRODUCTION?
Alternative products that firms produce (e.g. Apple - mac, iPad, iPod)
Typically, these substitutes:
- use similar components
- are assembled in same factory
How does the NUMBER OF THE FIRMS in the market affect supply?
When a new firm enters the market, supply curve shifts right.
When a firm leaves the market, supply curve shifts left.
How does the EXPECTED FUTURE PRICES in the market affect supply?
Cos if the firm expects product price will be higher in the future, incentive to decrease supply now and increase supply in the future.
What happens to the supply if the PRICE OF INPUT increases?
Supply curve shifts LEFT
Cos cost of production increases
What happens to the demand if the PRODUCTIVITY increases?
Supply curve shifts RIGHT
Cos cost of production decreases
What happens to the demand if the PRICE OF SUBSTITUTE IN PRODUCTION increases?
Supply curve shifts LEFT
Cos more of substitute is produced, less of the first product produced
What happens to the demand if the NUMBER OF FIRMS IN MARKET increases?
Supply curve shifts RIGHT
Cos additional firms mean a greater quantity supplied at every price
What happens to the demand if the PRICES EXPECTED to increase in future?
Supply curve shifts LEFT
Cos less of produced offered for sale now, instead held to take of increased future prices
What is CHANGE IN SUPPLY?
Refers to a shift OF the demand curve.
Occurs if there is a change in one of the variables (but not price) that affects the willingness of firms to sell the product.
What is CHANGE IN QUANTITY SUPPLIED?
Refers to a movement ALONG the demand curve.
Occurs if there is a change in price
What is MARKET EQUILIBRIUM?
A situation where quantity supplied = quantity demanded
What is the EQUILIBRIUM POINT?
Where EQUILIBRIUM PRICE and EQUILIBRIUM QUANTITY meet
What are COMPETITIVE MARKETS?
A market that has many buyers and sellers
What is the COMPETITIVE EQUILIBRIUM POINT?
The EQUILIBRIUM in a competitive market
What is SURPLUS?
A situation where quantity supplied > quantity demanded
What are examples of surplus?
- firms have unsold goods gathering
- incentive to increase sales by reducing price thus increasing quantity demanded and decreasing quantity supplied
What is SHORTAGE?
A situation where quantity supplied < quantity demanded
What are examples of shortage?
- some consumers unable to buy good
- firms realise they can increase price without losing sales - higher prices will increase quantity supplied, and decrease quantity demanded
What is true at COMPETITIVE MARKET EQUILIBRIUM POINT
- all consumers willing to pay the market price can buy as much of product as want
- all firms willing to pay the market price can sell as much of product as want
Does a shift in the demand/supply curve causing a change in the Eq, point mean a further shift in supply/demand?
No
E.g.
- change in supply caused price to fall
- so, increase in quantity demanded
What determines MARKET EQUILIBRUM?
Interaction btw supply and demand
What is a MARKET?
Any arrangement that brings together buyers and sellers
What is QUANTITY DEMANDED?
The amount the consumer can buy at any given price
What is a MARKET?
The demand by all consumers in market
What is the LAW OF DEMAND?
Holding everything else constant, when price
- decreases, quantity demanded increases
- increases, quantity demanded decreases
What is CETERIS PARIBUS?
It means ALL ELSE BEING EQUAL - it is a requirement when anaylysing the relationship between two variables
What is the SUBSTITUTION EFFECT?
A change in quantity demanded that result from a chane in price that makes a product more/less expensive relative to an substitute product
What is the INCOME EFFECT?
A change in quantity demanded that results from effect of a change in th price on CONSUMER PURCHASING POWER
What is CHANGE IN DEMAND?
A change in the quantity that people plan to buy when any non-price determinat/influence changes.
What are the variables that can change market demand?
Income Price of related goods Taste Demographics Expected future prices
What happens to the demand of a normal good when income increases?
When income increase, demand for normal goods increase.
What are normal goods?
E.g. brand names
What happens to the demand of a normal good when income decreases?
When income decrease, demand for normal goods decrease.
What happens to the demand of an inferior good when income increases?
When income increases, demand for inferior goods decreases.
What happens to the demand of an inferior good when income decreases?
When income decreases, demand for inferior goods increases.
What is an inferior good?
e.g. generic/store brand
What are substitutes?
Goods/services that can be used for a similar purpose
What happens when price of a substitute increases?
Demand for substitute good decreases
Demand for original good increases
What happens when price of a substitute decreases?
Demand for substitute good increases
Demand for original good decreases
What are complements?
Goods/services used together
What happens when price of a complement increases?
Demand for complement good decreases
Demand for original good decreases
What happens when price of a complement decreases?
Demand for complement good increases
Demand for original good increases
What are tastes?
Many subjective elements that can affect consumers’s plan to buy a product
What happens to demand when populatoin increases?
Demand increases.
Why does expected future prices affect demand?
Cos’ consumers choose when to buy goods based on expectations of future prices
What happens to demand if consumers expect higher future prices?
Demand today increases so consumers can afford future higher prices.
What happens to demand if consumers expect lower future prices?
Demand today decreases so consumers capitalise on future lower prices.
What is a CHANGE IN DEMAND?
a SHIFT IN the demand curve due to change of a non-price determinant/variable
What is a CHANGE IN QUANTITY DEMANDED?
a MOVEMENT ALONG the demand curve due to a change in product price
What is QUANTITY SUPPLIED?
The amount a firm can/will supply at any given price
What is MARKET SUPPLY?
Supply by all firms in the market
What is the LAW OF SUPPLY?
Holding everything else constant, when price:
- increases, quantity supplied increases
- decreases, quantity supplied decreases
What is CHANGE IN SUPPLY?
a change in quantity that suppliers plan to sell when any non-price determinat/variable changes
What variables affect supply?
- price of input
- technological change
- price of subsitutes in production
- number of firms in the market
- expected future prices
What are examples of inputs?
Rent, wages, interest
What happens to supply when price of input increases?
Supply decreases
What happens to supply when price of input decreases?
Supply increases
Why does technological change affect supply?
Cos’ it affects firm’s ability to produce output with given amount of input .
It results in MORE OUTPUT from SAME INPUT, therefore increasing productivity
What is PRODUCTIVITY?
output per unit of input
What are substitutes in production?
alternative products a firm can produce with same resources
What happens to demand when the price of substitutes in production increases?
Supply of initial product decreases
What happens to demand when the price of substitutes in production decreases?
Supply of initial product increases
What happens to demand when number of firms in market increase?
Supply increases
What happens to demand when number of firms in market decrease?
Supply decreases
What happens to supply when future price is expected to increase?
Supply today decreases
What happens to supply when future price is expected to decrease?
Supply today increases
What is CHANGE IN SUPPLY?
a SHIFT IN supply curve due to change in non-price determinant variables
What is CHANGE IN QUANTITY SUPPLIED?
a MOVEMENT ALONG the supply curve due to a change in price
What is MARKET EQUILIBRUM?
When quantity demanded = quantity supplied
What is COMPETITIVE MARKET EQUILIBRUM?
MARKET EQUILIBRUM with many buyers and sellers
What is SHORTAGE?
When QUANTITY SUPPLIED < QUANTITY DEMANDED
What is SURPLUS?
When QUANTITY SUPPLIED > QUANTITY DEMANDED
What is effect of new firm in market?
- Increase in Supply
- More products at every price
- Supply curve shifts right
- PRICE FALLS
- QUANTITY INCREASES
What is effect of increase in demand/population?
- Increase in Demand
- Demand curve shifts right
- Quantity demanded at every price increases
- PRICE INCREASES
- QUANTITY INCREASES
What happens if DEMAND INCREASES?
Creates a shortage
Price Increases
What happens if DEMAND DECREASES?
Creates a surplus
Price Decreases
What happens if SHORTAGE INCREASES?
Creates a surplus
Price Decreases
What happens if SHORTAGE DECREASES?
Creates a shortage
Price Increases
What happens when change to DEMAND and SUPPLY?
When 2 events occur need to determine how they influence the market
What happens if DEMAND and SUPPLY INCREASE?
Quantity INCREASES
Price - depends on relative shift of curves
What happens if DEMAND and SUPPLY DECREASE?
Quantity DECREASES
Price - depends on relative shift of curves
What happens if DEMAND INCREASES and SUPPLY DECREASES?
PRICE INCREASES
Quantity - depends on relative shift of curves
What happens if DEMAND DECREASES and SUPPLY INCREASES?
PRICE DECREASES
Quantity - depends on relative shift of curves
