Microeconomics - L1 - Supply, Demand & Equilibrium Flashcards Preview

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Flashcards in Microeconomics - L1 - Supply, Demand & Equilibrium Deck (20):
1

The demand curve definition

The amount that consumers are willing and able to buy at a given price in a given time period

2

The law of demand

As prices rises, demand will fall.

Income effect - as price rises, goods or services become less affordable

Substitution effect - cost of Good is higher than close substitute

3

Factors of demand

Tastes/trends
Substitute goods
Complementary goods
Income (normal goods - income rises, demand rises)
Income distribution
Expectations

4

Demand movements

Change in price - movement along

Change in demand - shift in demand curve

5

Demand functions

Simple
QD = a - bP

Complex
QD = a - bP + cY

P = price
A=plots the starting point of the demand curve on the Y axis (y intercept)

B= slope of the demand curve.

6

Supply definition

Different quantities of a good/service firms are willing and able to supply at various prices in a given time period

7

Determinants of supply

Cost of production
Profitability of alternative products
Profitability of complementary goods
Natural disasters
Aims of producers (profit max or sales)
Competition

8

Supply curve movement

Change in price = movement along curve


And other determinants = shift in curve

Basic rule - higher price, higher supply

9

Alternative possible reasons for increase in supply

Fall in cost of production
Reduced profitability of alternative goods
Benign shocks - new oil field found
Expectations of a fall in price ( want to produce more and make sales whilst price is still high)

10

Supply function

Simple

Qs = a + bP

A=plots the staring point of the supply curve on the Y axis

B= slope of the supply curve.

11

Equilibrium Price

Where S=D

Only one price is sustainable (market eq)
When S=D, markets is said to ‘clear’
Market eq will be reached automatically due to free market theory (classical/monetarist theory)

12

Shortage definition in market equilibrium

Where the price is below the market equilibrium

13

Surplus in market equilibrium

Where the price is higher than the market equilibrium

14

Best steps in analysing a market

1. Impact on demand or supply?
2. Which direction does the curve shift?
3. Compare the new equilibrium with the old one.

15

Utility definition

The satisfaction gained by the purchasing of a good or service

we tie utility to money, eg: how much would is an extra unit worth to the consumer?

16

Total utility definition

The total satisfaction gained from all the units of a commodity consumed within a period

17

Marginal Utility definition

additional satisfaction gained from consuming one extra unit

18

Marginal consumer surplus definition

MCS is the difference between what you are willing to pay and what you are actually charged for a product.

if i were willing to pay 30p and it only cost 25p, MCS would be 30-25=5.

19

Total consumer surplus

TCS is the sum of all the MCSs you have obtained from all the units of a good that you have consumed.

if i were willing to pay 1.40 for 4 packets of crisps, but it only cost me 1, tcs is 40.

TSC = TU - expenditure


20

Important notes

-Marginal Utility = Demand curve (measured in money)
-'source of market value for a good is its marginal utility, not total utility.'
-Market surplus and shortage (of goods) are dealt in terms of supply of goods