Chapter 2 Flashcards
Define Demand and state its law
Demand of an individual is the various quatities of the good and service the cinsumer is willing and able to buy at different possible prices
Law of demand states there is a negetive relation between the price of a good and its quantity demanded over a period of time,ceteris peribus
What is Market Demand
Sum of all individual demands for a good
Draw a demand curve
page 43
Shifts in demand curve
Right : increase in demand
Left: Decrease in Demand
Movement in Demand curve
Occurs on the same curve
Right = increase
Left= Decrease
Non- Price determinants of Demand
- Income in case of normal good
- Demand for good varies directly with income - Income in case of inferior good
- Demand for good varies inversly with income - Preferacnes and taste
- Price of substitute good
- fall in price of substitue good = fall in demand for the other - Prices of complimentery good
- fall in price of one will lead to an increase in demand of another - Number of consumers
Assumptions underlying the law of demand
Law of diminishing marginal utility
-with each additional unit consumed , marginal utility decreases
Income effect
Fall in price means an increas in real income(purchasing power) hence increasing demand
Substitution effect
If price of good falls the consumer substitutes (buys more) of the now cheaper good
Define supply
State its law
indicates various quantitites of a good a firm is willing and able to produce to the market
There is a positive relation between the price of the good and the quantity supplied over time, ceteris peribus
Draw a supply curve
Page 51
Movements in supply curve
Same curve
Right= increase
Left = decrease
Shifts in supply curve
Change of curve
Right= increase
Left = decrease
Non- price Determinants
- Costs of factor of production
- increase in one leades to decrease in another - Technology
- improvemnet leads to increase of supply - Prices of related goods: competitive supply
- 2 goods with same resources
- increase in one causes decrease in another - Prices of related good: Joint Supply
- Goods that are derived from single product
- increase in one leads to increase in another - Producer price expectation
- if firms expect price to rise, supply will decrease ( vice-versa) - Taxes
- increase of taxes = decrease of supply - Subsidies
- increase of subsidies = increase of supply - Number of Firms
- more firms = more supply - Shocks
- sudden unpredictable events affecting supply
Asumptions underlying lawof supply
- Law of diminishing marginal returns
- with an increase of variable input to one or more fixed input, the marginal product will increase and first but at a point will begin to decrease - Increasing Marginal costs and the firm’s supply curve
- marginal product increases, marginal cost decreases
- marginal product is maximum, marginal cost is minimium
- marginal product falls, marginal cost increases
Draw marginal cost and marginal product graph
57 page
Draw a market equillibrium graph
(i) Show increase in demand
(ii) Show decrease in supply
Page 58- 60
Define Shortage and Surplus
Shortage is excess demand and lack of supply
Surplus is excess supply and lack of demand
Draw graphs of free and economic goods
Page 61
Signals and incentives
Signals communicate information to decision-makers
Incentives motivate decision-makers to respond to the information
Consumer surplus
Area under the demand curve and above equilibrium
Producer surplus
Area above the supply curve and below the equilibrium
Social Surplus
Sum of Producer and consumer surplus
Alocative efficiency
Marginal benefit = Marginal Cost
Demand = Supply
