demand and supply

• effective demand


  amount that consumers are willing and able to buy of a good/service at any given price
• consumers goal

  maximise utility
• what is utility


  measure of satisfaction that we get from purchasing and consuming a good or service
• total and marginal utility

  total utility- total satisfaction faction from a given level of consumption

  marginal utility- change in satisfaction from consuming an extra unit
• law of diminishing marginal utility

  each time another unit of a good is consumed, overall satisfaction will decrease
• the demand curve

  • downward curve as inverse relationship between price and quantity demanded
  • shows quantity demanded at any given price
• contraction and expansion (demand)

  contraction- increase in price leads to decrease in quantity demanded

  expansion- decrease in price leads to increase in quantity demanded
• shifts (demand)


  demand curve shifts left- decrease in demand

  demand curve shifts right- increase in demand
• factors affecting demand

  • substitutes
  • compliments
  • population changes
  • advertisement/ taste/ fashion
  • changes in legislation
  • income and wealth
• what is “supply”?


  the quantity of goods thag sellers are prepared to sell at any given price over a period of time
• the supply curve


  • upwards curve due to positive relationship between price and quantity supplied
  • assumes that firms are motivated by profit
• shifts (supply)

  shift to the left- lower supply at each price

  shift to right- greater supply at each price
• factors affecting supply

  • costs of production
  • new technology
  • subsidies
  • indirect taxation
  • producer cartels
  • seasons
  • expectations of future price
• market equilibrium 


  achieved when planned demand is equal to planned supply and there is no incentive for buyers or sellers to change their market plans

  no excess demand or supply
• what is a shortage

  an excess of demand

  quantity demanded> quantity supplied
• what is a glut

  excess supply

  quantity supplied > quantity demanded
• what does a classical economist believe?

  the market writes itself