DEMAND AND SUPPLY Flashcards
Law of demand…
The law of demand states that there is an inverse relationship between price consumers re prepared to pay with quantity demanded.
- as price increases, quantity demanded decreases
- as price decreases, quantity demanded increases
Law of supply…
The law of supply indicates that there is a positive relationship between price and quantity supplied.
- as the price increases, the quantity supplied increases.
- as the price decreases, the quantity supplied decreases.
Factors causing a shift in the demand curve…
- Changes in disposable income
- Prices of substitutes and compliments
- Preferences, tastes and trends
- Interest rates on loans
- Population / demographic changes
- Consumer sentiment (economic optimism/consumer confidence)
- Govt. regulations
- Seasonal conditions
- Advertising / promo campaigns
- media attention
Factors causing a movement along the demand curve…
EXPANSION: Increase in demand in response to a lower price.
CONTRACTION: Decrease in demand in response to a higher price.
Factors causing a shift in the supply curve…
- Cost of production
- Technology
- Productivity
- Climate conditions
Factors causing a movement in the supply curve…
EXPANSION: increase in supply in response to higher price.
CONTRACTION: decrease in supply in response to a lower price.
Price elasticity of demand…
The PED measures the responsiveness of changes in the quantity demanded to changes in price. The PED determines the slope of the demand curve - as the PED increases, the curve is more flat. As the PED decreases the curve is more steep.
PED is measured by; % change in quantity demanded divided by % change in price.
Factors affecting PED…
- Degree of necessity
- availability of substitutes
- proportion of income
- Time
- Minor complementary items
Significance of PED…
- PED is an important measure for business decisions and for the govt.
- Businesses usually prefer to have a low PED as they can pass a tax onto the customer (increase prices) without loosing too much revenue.
- PED of products influence the types of goods that may be taxed and who pays the most of the tax.
Price elasticity of supply…
The PES looks at how business alter their supply in response to changing prices. The PES is measured by the percentage change in quantity supplied divided by percentage change in price. As the PES increases the slope is more flat and as the PES decreases it becomes more steep.
Factors affecting PES…
- Production period
- Spare capacity
- Durability of goods
Significance of the PES…
- PES can affect the the economic viability of a business as well as their ability to respond to changing price signals.
- PES influences decisions of producers and market decisions.
