ECO - 2.3-2.6 Demand, Supply, Price

    Cards (56)

    • Demand
      The quantity of goods and services that consumers are willing and able to purchase at different prices, over a particular period of time, ceteris paribus
    • Demand is also known as effective demand - demand that is supported by the ability to pay
    • Willing
      Consumers must desire the goods
    • Able
      Consumers must have the purchasing power or money to buy the goods
    • Ceteris paribus
      All other things remain unchanged
    • Law of demand
      The quantity demanded of any good will increase as its price falls and vice versa. There is an inverse relationship between price and quantity demanded, ceteris paribus
    • The demand curve is downward-sloping
    • Reasons for downward-sloping demand curve
      • Income effect: If price of a good falls, consumers' purchasing power increases and they can afford to purchase more
      • Substitution effect: If price of a good rises, consumers may switch to purchasing rival products which are close substitutes
    • Individual demand
      Demand by an individual consumer who is willing and able to buy that particular product, at different prices
    • Market demand
      Total demand by all consumers who are willing and able to buy that particular product, at different prices
    • Demand schedule
      A table that displays the different quantities demanded of a product (by one consumer or all consumers in the market), at different prices
    • To derive the market demand curve, we sum the quantities demanded at every price
    • Changes in demand curve
      1. Movement along the demand curve: A change in the price of the good itself results in a change in quantity demanded
      2. Shift in the demand curve: A change in any other factors/determinants/conditions of demand (except for price of the good itself) can result in an increase or decrease in demand for the good
    • Non-price determinants of demand
      • Households' income
      • Prices of related goods
      • Population
      • Taste and preferences
      • Seasonal changes
      • Consumer expectations
      • Government policies
      • Interest rates
    • A change in the price of the good leads to a change in quantity demanded of the same good, ceteris paribus. This is represented by a movement along the demand curve
    • A change in any of the non-price determinants will lead to a change in demand of the good, ceteris paribus. This is represented by a shift of the demand curve
    • Supply
      The quantity of goods and services that producers are willing and able to sell at different prices, over a particular period of time, ceteris paribus
    • Supply is also known as effective supply
    • Willing
      Producers must have the desire to produce
    • Able
      Producers must have the power or money to produce the goods
    • Law of supply
      As price increases, quantity supplied also increases. There is a direct relationship between price and quantity supplied, ceteris paribus
    • The supply curve is upward-sloping
    • Reason for upward-sloping supply curve
      • Higher price means more revenue and profits can be earned - an incentive for firms to raise quantity supplied
    • Individual supply
      Supply by an individual firm who is willing and able to sell that particular product, at different prices
    • Market supply
      Total supply by all firms in the industry who are willing and able to sell that particular product, at different prices
    • Supply schedule
      A table that displays the different quantities supplied for a product (by one producer or all producers in the market), at different prices
    • Changes in supply curve
      1. Movement along the supply curve: A change in the price of the good itself results in a change in quantity supplied
      2. Shift in the supply curve: A change in any other factors/determinants/conditions of supply (except for price of the good itself) can result in an increase or decrease in supply of the good
    • Individual supply schedule
      Represents the quantity supplied by an individual firm at various levels of price
    • Individual supply curve
      Plotted based on information from the individual supply schedule
    • Market supply schedule
      Shows the relationship between the total quantity supplied by ALL firms at various levels of price
    • Market supply curve
      Plotted based on information from the market supply schedule
    • Changes in supply curve
      1. Movement along the supply curve
      2. Shift in the supply curve
    • Movement along the supply curve
      • A change in the price of the good itself results in a change in quantity supplied
      • Upward movement - rise in price leads to increase in quantity supplied
      • Downward movement - fall in price leads to decrease in quantity supplied
    • Shift in the supply curve
      • A change in any other factors/determinants/conditions of supply (except price of the good) can result in an increase or decrease in supply for the good
      • Shift to the right - increase in supply
      • Shift to the left - decrease in supply
    • Non-price factors/determinants/conditions of supply
      • Cost of production
      • Price of related goods
      • Expectations of future prices
      • Size of industry
      • Government policies
      • Other factors
    • Cost of production
      If cost of production increases, production becomes less attractive as less profits are earned at every price, hence firms will reduce supply of the good
    • Price of related goods - Joint supply
      An increase in the price of one good produced in joint supply leads to an increase in the supply of the other good
    • Price of related goods - Competitive supply
      An increase in the price of one good in competitive supply leads to a decrease in the supply of the other good
    • Expectations of future prices
      Expected increase in future price of the good leads producers to reduce current supply temporarily and stock up the good
    • Size of industry
      As new firms enter the industry, total number of suppliers increase, causing market supply for the industry to rise
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