Demand and Supply

• What is a market

  Any situation where buyers and sellers come into contact to exchange goods and services
• What is a product market

  Where buyers and sellers interact to trade goods and services
• What is a factor market

  Where buyers and sellers interact to trade factors of production
• What is a labour market

  Where buyers and sellers interact to trade labour
• What is a housing market

  Where buyers and sellers interact to trade houses
• What is a stock market

  Where buyers and sellers interact to trade shares
• What is a foreign exchange market

  Where buyers and sellers interact to trade currency
• Free markets are a way of allocating resources and solving the basic economic problem
• In a free market, all economic agents are free to do what they want (no government involvement)
• What are the objectives of a buyer in a market

  Maximise economic welfare / utility from consuming, low prices, quality
• What are the objectives of a producer/firm in a market

  Maximise profit, maximise revenues, minimise costs
• What is rational behaviour

  When economic agents choose the option that maximises their net benefits
• Are economic agents always rational in their decision making

  No
• How do free markets allocate resources

  Individuals pursuing their own self-interest, making rational decisions
• What is to be produced in a free market

  What the consumer wants
• How are products produced in a free market

  At the cheapest cost ( efficient use of scarce resources )
• For whom are products in a free market produced for

  Owners of the factors of production
• In a free market, individuals pursuing their own self interest would be led ‘ as by an invisible hand ‘ to do things that are in the interests of society as a whole
• What is a competitive market

  A market in which a large number of producers compete with each other to satisfy the wants and needs of a large number of customers
• Define demand

  The desire to buy a good or service at a given price, backed by the ability to pay for that good or service
• Define the determinants of demand

  The factors that affect the demand for a good or service
• What are the determinants of demand

  Consumer’s income , prices of other goods , population changes , social changes
• What happens to the demand for goods when consumer income falls

  Demand for inferior goods rise, while demand for normal goods fall
• An increase in the price of a substitute for a good will cause an increase in demand for the good as the good now has a more favourable price than the substitute
• An increase in the price of a complement to a good will reduce demand for the good as less people buy the complement so do not need the good that comes with it
• How does population affect demand

  A larger population will mean there is more demand, age can also affect it (e.g demand for children’s clothes falls in an aging population)
• How do social changes affect demand (e.g)

  A rise in divorce rates and a decline in marriage rates leads to a increase in demand for small houses and flats to rent/buy
• What does ceteris paribus mean?

  Assuming other things remain equal
• What is the law of demand

  As price falls quantity demanded rises and if price rises quantity demanded will fall, ceteris paribus (a negative relationship)
• What are the reasons for the law of demand

  The substitution effect , the real income effect
• What is the substitution effect

  When the price of a good rises it will be substituted with lower priced goods and services.
• What is the real income effect

  When prices rise people experience a fall in real incomes. When an individual feels poorer they will buy less goods and services
• Changes in the determinants of demand other than price will shift the demand curve
• Define supply

  The quantity of a good or service that suppliers wish to sell over a range of prices over a time period
• What are the determinants of supply

  The price of inputs, the price of other goods, technology, taxes and subsidies, expectations, weather, seasons, natural resources, government policy, world affairs
• Why is the supply curve positively sloping

  Existing suppliers will move more of their resources into the production of this product as they expect higher profit.

  New suppliers will enter the market as they see that there are higher prices and therefore higher profits to be gained
• What determinants shift the supply curve

  Cost of inputs, productivity, technology, seasonal supply, availability of natural resources, government policy, world affairs, taxes and subsidies, expectations, weather
• Define equilibrium

  Where opposing forces are equal and there is therefore no tendency to change, ceteris paribus. In a free market this is where Qs is equal to Qd
• What happens if Qs > Qd

  Glut / Excess supply
• What happens if Qs < Qd

  Shortage / Excess demand