ECON UNIT 1 AOS 2: Law of Supply and Demand Flashcards
(20 cards)
What is the law of demand?
As the rice increases, the quantity demanded decreases, as the price decreases, the quantity demanded increases. There is an inverse relationship between price and quantity demanded.
What are non price factors that impact demand?
Interest rates, disposable income, price of substitutes and complements, preferences and tastes, changes in population, consumer sentiments, government intervention, weather and advertising
What causes a contraction along the demand cuve?
When the price increases, there is a contraction along the demand curve.
What causes an expansion along the demand curve?
When the price decreases, there is a contraction along the demand curve.
What is the law of supply?
As the price of a product increases, the total quantity supplied increases, and as the price decreases, the total quantity supplied decreases. There is a positive relationship between price and quantity supplied.
What are the non price factors that impact supply?
Cost of production, technological change, productivity growth, climatic conditions, disruptions (war and pandemic), government intervention
What causes a contraction along the supply curve?
When the price decreases, there is a contraction along the supply curve.
What causes an expansion along the supply curve?
When the price increases, there is an expansion along the supply curve.
What causes a shortage?
When there is excess demand, a shortage occurs:
- When the demand curve shifts to the right and the supply curve remains unchanged
- When the supply curve shifts to the left and the demand curve remains unchanged.
What causes a surplus?
When there is excess supply, a surplus occurs:
- When the demand curve shifts to the left and the supply curve remains unchanged
- When the supply curve shifts to the right and the demand curve remains unchanged
What is market equilibrium?
A point of intersection between the supply and demand curves of price and quantity, that producers are motivated to supply because they can make profit, and where consumers are satisfied to demand because the value is reflected well in the price.
How do you reach equilibrium after the demand curve shifts to the right?
The demand curve (D1) and supply curve (S1) originally meet at the equilibrium price and quantity of Pe1. Due to a non price factor, such as an increase in disposable income for consumers, the demand curve shifts to the right to D2, and increases the demand at all price points. At Pe1, the demand from D2 has increased, whilst the supply from S1 remains unchanged, causing a shortage as the quantity demanded is larger than the quantity supplied. To reach equilibrium and clear the shortage, there must be a contraction in the quantity demanded, and an expansion in the quantity supplied over time. Eventually, equilibrium will be reached at an increased price and quantity at Pe2, clearing the shortage and disequilibrium.
How do you reach equilibrium after the demand curve shifts to the left?
The demand curve (D1) and supply curve (S1) originally meet at the equilibrium price and quantity of Pe1. Due to a non price factor, such as a decrease in disposable income for consumers, the demand curve shifts to the left to D2, and decreases the demand at all price points. At Pe1, the demand from D2 has decreased, whilst the supply from S1 remains unchanged, causing a surplus as the quantity demanded is smaller than the quantity supplied. To reach equilibrium and clear the surplus, there must be a contraction in the quantity supplied, and an expansion in the quantity demanded over time. Eventually, equilibrium will be reached at a decreased price and quantity at Pe2, clearing the surplus and disequilibrium.
How do you reach equilibrium after the supply curve shifts to the right?
The supply curve S1 and demand curve D1 meet at the equilibrium price and quantity of Pe1. Due to a non price factor, such as a decrease in the cost of production, the supply curve will shift to the right and increase at each price point. At Pe1, the supply from S2 has decreased, whilst the demand from D1 remains unchanged, causing a surplus as the quantity supplied is larger than the quantity demanded. To reach equilibrium and clear the surplus, there must be a contraction in the quantity supplied, and an expansion in the quantity demanded over time. Eventually, equilibrium will be reached at a decreased price but increased quantity at Pe2, clearing the surplus and disequilibrium.
How do you reach equilibrium after the supply curve shifts to the left?
The supply curve S1 and demand curve D1 meet at the equilibrium price and quantity of Pe1. Due to a non price factor, such as an increase in the cost of production from a government tax, the supply curve will shift to the left, and decrease at each price point. At Pe1, the supply from S2 has decreased, whilst the demand from D1 remains unchanged, causing a shortage as the quantity supplied is smaller than the quantity demanded. To reach equilibrium and clear the shortage, there must be a contraction in the quantity demanded, and an expansion in the quantity supplied over time. Eventually, equilibrium will be reached at an increased price but decreased quantity at Pe2, clearing the shortage and disequilibrium.
What is the difference between absolute and relative price?
Absolute price is the amount of money that is paid for a good or service; relative price is the price of one thing in terms of another
What effects does increasing absolute price for two goods at the same rate have on relative price and allocation of resources?
Whilst the relative price of one good is higher, the relative price change has remained constant for both goods. Hence, there will be no reallocation of resources.
What effects does increased demand and absolute price for one good have on relative price and allocation of resources?
When there is an increased in demand, caused by a non price factor, there will be a shift to the right in the demand curve, making a new equilibrium at a higher quantity and price - driving up the absolute price. As the new absolute price results in a higher relative price, and a lower price for the other good, more resources will be allocated to the production of the good with a higher relative price to maximise profits.
What effects does increased supply and lower absolute price for one good have on relative price and allocation of resources?
Due to the increased supply for a good from a non price factor, there will be a shift to the right for the supply curve, making a new equilibrium at a lower price but higher quantity. This causes the relative price to decrease for that good and the relative price for the other good to increase. Despite the lowered relative price of one good, if the two relative prices are equal, production will continue as usual to keep up with demand. However, when the relative price drops below the other good, resources will be reallocated to the other good to maximise profits.
What effects does decreased supply and higher absolute price for one good have on relative price and allocation of resources?
Due to the decreased supply for a good from a non price factor, there will be a shift to the left for the supply curve, making a new equilibrium at a higher price but lower quantity. This causes the relative price to increase for that good, and the relative price of the other good to decrease. Despite the higher relative price for the good, the decrease in supply may have been caused by an increase in the cost of production, discouraging the producers to continue production. Whilst consumers may be attracted to the lower absolute price of the other good, increasing demand. Hence, to maximise profits and minimise costs, resources will be reallocated to producing the other good.
