Demand, supply and equilibrium Flashcards
What is Demand?
The quantity of a good or service that consumers are both willing and able to purchase, at a particular price at a particular point in time.
What is the Law of Demand?
Price and quantity are inversely related i.e. If prices go up demand goes down & vice versa. This holds true under the ‘ceteris paribus’ principle.
What is a normal good?
As a person’s income rises, their demand for a normal good will increase.
E.g. branded chocolate, nice clothes, cars, big TV
What are inferior goods?
As a person’s income rises, their demand for an inferior good will decrease.
E.g. home brand chocolate, Kmart clothes, Hyundai Getz, small tv
What is the substitution effect?
When the price of one good rises other goods become more attractive to buyers because they are relatively cheaper
What is the income effect?
The change in the consumption of goods based on income. This means consumers will generally spend more if they experience an increase in income.
What are the non-price factors affecting demand?
Tastes and preferences, advertising, availability and price of credit, price of substitutes, price of complimetary goods, population factors
What does an increase in price cause?
A contraction in demand
What does a decrease in price cause?
An expansion in demand
What is supply?
Supply is amount of product producers are willing and able to sell at a particular price over a given period of time.
What is the law of supply?
Price and quantity are directly related i.e. If prices go up supply goes up & vice versa
Why does a supply curve slope upward from left to right?
The profit motive: When the market price rises following an increase in demand, it becomes more profitable for businesses to increase their output
Production costs: When there is a larger output, a firms production costs tend to rise, therefore a higher price is needed to cover these extra costs of production.
New entrants coming into the market: Higher prices may create an incentive for other businesses to enter the market leading to an increase in total supply.
What are the non price factors affecting supply
Price of other goods that they could produce
Expectations of producers
Resource prices
Technology
What is a market?
a situation where the buyers and sellers have the opportunity to exchange goods and services for money.
In other words where there is a demand and supply for a product or service for exchange.
What is market equilibrium?
Market Equilibrium is the price and quantity that consumers are happy to buy and the suppliers are also satisfied to produce. It balances the buying intentions of consumers and the selling intentions of sellers.
