PPT 3

• Demand


  A schedule or a curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time

  
• Demand Curve

  A curve illustrating the inverse (negative) relationship between the quantity demanded of a good or service and its price, other things equal

  
• Law of Demand

  All else equal, as price falls, the quantity demand rises, and vice versa
• Diminishing Marginal Utility


  As a consumer increases the consumption of a good or services, the marginal utility obtained from each additional unit of the good or service decreases
• Income Effect


  A change in the price of product changes a costumer's real income (purchasing power, and thus the quantity of the product purchased
• Substitution Effect


  A change in the price of consumer good changes the relative expensiveness of that good product and hence changes the willingness to buy it rather than other goods
• Determinants of Demand

  • Taste and preferences
  • Number of buyers
  • Income
  • Future prices
  • Prices of related goods
  • Size of population
  • Others
• Normal good


  A good or service whose consumption rises when income increases and falls when income decreases, price remaining constant
• Inferior good


  A good or service whose consumption declines when income increases and increases when income decreases, price remaining constant
• Substitute goods


  Products or services that can be used in placed of each other
• Complement goods


  Products and services that are used together
• Supply


  A schedule or a curve that shows the amount of a product that producers are willing and able to make available for sale or purchase at each of a series of possible prices during a specified period of time

  
• Supply Curve


  A curve illustrating the positive (direct) relationship between the quantity supplied of a good or service and its price, other things equal

  
• Law of Supply

  The principle that, other things equal, an increase in the price of a product will increase the quantity supplied, and conversely for a price increase
• Determinants of Supply

  • Cost of production
  • Availability of economic resources
  • Number of firms in the market
  • Technology applied
  • Producer's goal
  • Taxes and subsidies
  • Prices of other goods
  • Changes in quantity demanded
  • Others
• Equilibrium Price


  The price in a competitive market at which the quantity demanded and the quantity supplied are equal
• Equilibrium Quantity


  The quantity demanded and quantity supplied at equilibrium price in a competitive market
• Surplus


  The amount by which the of a quantity supplied of product exceeds the quantity demanded at a specific (above equilibrium) price
• Shortage


  The amount by which the of a quantity demanded of product exceeds the quantity supplied at a specific (below equilibrium) price
• Productive Efficiency


  The production of a good in the least costly way
• Allocative Efficiency


  The distribution of resources among firms and industries to produce the goods most wanted by society
• Demand might change because of fluctuation of consumer taste and preferences, change in consumer expectations or variation of prices of related goods
• Supply might change in response to changes is resources prices, technology, taxes and others
• An increase in demand


  Increases both equilibrium price and quantity
• A decline in demand


  Decreases equilibrium price and quantity
• An increase in supply

  Decreases equilibrium price and increases equilibrium quantity
• A decline in supply

  Increases equilibrium price and decreases equilibrium quantity
• When both demand and supply change, the effect is the combination of the individual effects
• A supply increase and a demand decrease both decrease price, so the net result is a price drop greater than that resulting from either change alone

  
• If the increase in supply is larger than the decrease in demand, the equilibrium quantity will increase. But if the decease in demand is greater than the increase in supply, the equilibrium quantity will decrease

  
• A decrease in supply and an increase in demand both increase price. Their combined effect is an increase in equilibrium price greater than that caused by either change separately

  
• If the decrease in supply is larger than the increase in demand, the equilibrium quantity will decrease. In contrast, if the increase in demand is greater than the decrease in supply, the equilibrium quantity will increase

  
• If the increase in supply is greater than the increase in demand, the equilibrium price will fall. If the opposite holds, the equilibrium price will increase
• The increases in supply and in demand each raise equilibrium quantity. Therefore, the equilibrium quantity will increase by an amount greater than that caused by either change alone
• If the decrease in supply is greater than the decrease in demand, equilibrium price will rise. If the reverse is true, equilibrium price will fall. The decreases in supply and demand each reduce equilibrium quantity, so the equilibrium quantity will fall

  
• Special cases arise when a decrease in demand and a decrease in supply, or an increase in demand and an increase in supply, exactly cancel out. In both cases, the net effect on equilibrium price will be zero, price will not change

  
• Price ceiling


  The maximum legal price a seller may charge for a good or service
• Price floor


  A legally determined price above an equilibrium. A minimum price fixed by the government
• Prices in most markets are free to rise and fall to their equilibrium levels, no matter how high or low it might be. However, the government sometimes concludes that supply and demand will produce price that are unfairly high for buyers or unfairly low for seller. In such cases, the government may place legal limits on how high or low the prices of commodity
• Supply curve S reflects a direct (positive) relationship between price and quantity supplied