1.4 demand and supply

• Define supply


  The willingness and ability for a producer to sell a good at a given price
• what does the equilibrium price show

  • the market clearing price- all goods and services are sold
• when price is above the equilibrium

  • there is excess supply
  • firms lose profits
  • price is lowered to reduce excess supply back to equilibrium
• when price is below equilibrium

  • excess demand (shortage of goods)
  • market forces push prices up back to equilibrium
• define marginal utility


  The satisfaction received after each additional unit of consumption
• what is diminishing marginal utility?


  The utility of a product decreases as consumption increases. consumers are willing to pay smaller amounts for each additional unit consumed.
• marginal utility formula


  change in total utility/ change in units
• Give 3 reasons why the demand curve slopes downwards

  1. Law of diminishing marginal utility
  2. income effect
  3. substituition effect
• consumer surplus


  The difference between the price a consumer is willing to pay for a good and the price they actually pay

  
• Define demand


  The willingness and ability of a consumer to purchase a good/ service at a given price in a given time period
• Producer surplus


  The difference between the price a producer is willing to sell for a good and the price they actually receive from selling it

  
• how do lower prices affect the demand curve

  Extension in demand

  
• how do higher prices affect the demand curve

  contraction in demand

  
• 2 things to remember about complements

  • they are products that are brought together
  • they are in joint demand
• 2 things to remember about substitutes

  • they are replacement goods
  • they are in competitive demand
• derived demand 


  when a good or service is only demanded because they are needed for the production of other goods (e.g bread and flour)
• composite demand


  when a good is demanded for two or more uses (e.g milk is used for cheese making, yoghurt, butter and to drink)
• joint supply


  when one good is supplied for two different purposes
• 4 factors leading to changes in demand

  • change in price (movements)- income + substitution effect
  • changes in income (shift)
  • changes in tastes/ perceptions (shift)
  • changes in price of a related good (shift)
• 4 factors leading to changes in supply

  • changes in price (movement)
  • changes in costs (shift)
  • changes in technology (shift)
  • exogenous factors (shift)