[COBMECO] Demand and Supply Analysis

• Market: A place where firms and households come together to carry out an economic transaction
• The types/ examples of markets include:

  1. Product or output market
  2. Factor or input market
  3. Stock market
  4. International Financial market
• Entrepreneur: A person who organises, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business.
• Perfectly competitive market: Large numbers of buyers and sellers acting independently; No individual seller or small group of sellershave the ability to control prices
• Demand: Quantity of a good or service that consumers arewilling AND able to purchase at different prices, ceteris paribus; also called "effective demand"
• Law of demand: Shows an inverse relationship between price& quantity demanded, ceteris paribus (↑ P → ↓ QD)
• Quantity demanded: Quantity of a good or service that consumers are willing AND able to purchase at a specific price.
• Income effect: The change in the quantity demanded of a good that results from the effect of a change in the good's price on consumers’purchasing power
• Substitution effect: The change in the quantity demanded of a good that results from a change in price, making the good more or lessexpensive relative to other goods that are substitutes
• The non-price determinants of demand are:

  1. Income
  2. Price of related goods
  3. Tastes and preferences
  4. Demographics
  5. Consumer expectations
• Normal Good: A good that is consumed more as income increases (↑ Y → ↑ D)
• Inferior Good: A good that is consumed less as income increases (↑ Y → ↓ D)
• Substitutes: Goods that are used in place of each other (Increase in PGood A → Increase in DGood B)
• Complements: Goods that are used together (Increase in PGood A → Decrease in DGood B)
• Favourable changes in consumer preferences increase demand for a good
• Consumer expectations include:

  1. Future incomes
  2. Future Prices
• Movement: Changes in price of a good and/or service lead to changes in its quantity demanded
• Shift: Changes in non-price determinants lead to changes in demand
• Giffen Good: A non-luxury item where there is an increase in demand when prices increase, defying the laws of demand.
• Veblen Good: A good that becomes more popular as price increases
• Supply: Quantity of a good or service that firms are willing AND able to produce and sell at different prices, ceteris paribus
• Law of supply: Shows a positive relationship between price & quantity supplied, ceteris paribus (↑ P → ↑ Q)
• Quantity supplied: Quantity of a good or service that firms are willing AND able to produce at a specific price
• Non-price determinants of supply:

  1. Number of firms
  2. Cost of factors
  3. Technological Change
  4. Price of related goods
  5. Producer expectations
• An increase in the number of firms increase overall supply of a good and/or service.
• Increase in cost of inputs will decrease supply.
• Increase in productivity will increase supply.
• SUBSTITUTES IN PRODUCTION: Alternative goods that a firm can produce (Increase in PGood A → Decrease in SGood B)
• COMPLEMENTS IN PRODUCTION: Goods that are produced together(Increase in PGood A → Increase in SGood B)
• Producers may withhold product for future supply if prices will rise.
• Equilibrium: A state of balance in the market
• Competitive market equilibrium: Quantity demanded is equal to quantity supplied
• Shortage: Quantity demanded is greater than the quantity supplied.
• Surplus: Quantity supplied is greater than the quantity demanded
• Linear equation for demand: Q = a - bP

  a -> change in non-price determinants of demand

  b -> slope of the demand curve
• Linear equation for supply: Q = c + dP

  c -> change in non-price determinants of supply

  d -> slope of the supply curve
• Price Mechanism: Forces of demand and supply allow marketsto move towards the equilibrium
• Signaling Function: Communicates information to consumers and producers
• Incentives Function: Provides incentives to consumers and producers
• Rationing Function: Price allows the distribution of scarce resources that reflect the current market situation