Flashcards in Microeconomics - L1 - Supply, Demand & Equilibrium Deck (20):
The demand curve definition
The amount that consumers are willing and able to buy at a given price in a given time period
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
Factors of demand
Income (normal goods - income rises, demand rises)
Change in price - movement along
Change in demand - shift in demand curve
QD = a - bP
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.
Different quantities of a good/service firms are willing and able to supply at various prices in a given time period
Determinants of supply
Cost of production
Profitability of alternative products
Profitability of complementary goods
Aims of producers (profit max or sales)
Supply curve movement
Change in price = movement along curve
And other determinants = shift in curve
Basic rule - higher price, higher supply
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)
Qs = a + bP
A=plots the staring point of the supply curve on the Y axis
B= slope of the supply curve.
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)
Shortage definition in market equilibrium
Where the price is below the market equilibrium
Surplus in market equilibrium
Where the price is higher than the market equilibrium
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.
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?
Total utility definition
The total satisfaction gained from all the units of a commodity consumed within a period
Marginal Utility definition
additional satisfaction gained from consuming one extra unit
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.
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