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| What is a Demand Schedule |
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Definition
A table that shows the relationship between the PRICE of the good and the QUANTITY DEMANDED
[image] |
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| the Demand Curve is the downward sloping line relating price to quantity demanded |
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| What is the Law of Demand? |
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Definition
The law of demand states that there is an inverse relationship between processing and quantity demanded.
As price INCREASES, quantity demanded DECREASES |
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| Function of Quantity Demanded |
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Definition
If everything else is held constant (caters [aribus), the quantity demanded can be expresses as a gentian of its own price:
Q = f(P) |
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| Inverse Demand Function function |
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Definition
P=F(Q)
P being the dependent variable |
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| Demand Curve Graph example and equation |
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Definition
[image]
Since Jim's demand curve is downwards sloping and straight, the equation is y = c -mx
Susptitute PROCE for y and QUANTITY for x: P = c- mQ |
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| What is the Market Demand? |
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Definition
Refers to the sum of all individual demands for a particular good or service.
Graphically, individual demand curves are summed horizontally to obtain the market demand curve because we want to add all quantities for a given price. |
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Term
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Definition
| Means all variables other than the ones being studied are assumed to be constant. Literally, ceteris paribus means “other things being equal.” |
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| Ceteris Paribus in the case of the demand curve |
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Definition
| The demand curve slopes downward because, ceteris paribus, lower prices imply a greater quantity demanded! |
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| What are Determinants of Demand? |
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Definition
| When factors other than the price of the good changes |
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| What is not a Determinant of Demand and why? |
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Definition
Price of the good itself is NOT a determinant of demand. It only determines the QUANTITY demanded.
If the price of the good itself changes, there will be a movement along the demand curve. |
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| Which are the four Determinants of Demand? |
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Definition
TIPS
- TASTE and FASHION: If advertising of the good increased, there would be a shift of the demand curve to the right
- INCOME: Generally, the more a person earns the more they will buy each good.
- PRICE OF RELATED GOODS: If price of complements or substitutes chances, the demand curve will shift.
-SIZE and NATURE of the POPULATION: The change would cause different sizes of shifts depending on the size of the population and its nature (ceteris paribus) |
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| Changes in QUANTITY DEMANDED example |
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Definition
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| Changes in Demand example |
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| If demand for a good is POSITIVELY related to INCOME it is called... |
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Definition
NORMAL GOOD.
- For more expensive goods e.g. wine, holidays etc.
-> Demand increases when income increases (can afford)
-> Demand decreases when income decreases (can no longer afford) |
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| If demand for a good is INVERSELY related to INCOME it is called... |
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Definition
INFERIOR GOOD.
- Cheap and normally lesser quality goods
-> Demand decreases when income increases (can afford more expensive goods)
-> Demand increases when income decreases (can no longer afford more expensive products) |
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Definition
| Two goods are substitutes if a rise in the price of one increases demand for the other e.g. Xbox and PlayStation. |
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| Substitute effects on Demand Curve |
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Definition
-> If price of a substitute increases (Xbox), demand for good increases as it is relatively more affordable (Play Station).
-> If price of substitute decreases, demand for good decreases as the other is the cheaper option |
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| Playstation and Xbox example of Substitute effect on Demand Curve |
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Definition
| Two goods complement if a rise in the price of one decreases demand for the other e.g. iPhones and iPhone cases |
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| Complement effects on Demand Curve |
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Definition
-> If price of complementary good increases (iPhones), demand for good decreases (iPhone cases)
-> If price of complementary good decreases, demand for good increases |
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| Example of effect of Complements on the Demand Curve |
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Definition
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| What is Quantity Supplied? |
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Definition
| the amount of a good that sellers are WILLING and ABLE to sell at every price. |
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| What is the Supply Schedule? |
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Definition
A table that shows the relationship between the price of the good and the quantity supplied.
[image] |
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| What is the Supply Curve? |
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Definition
The upward-sloping line relating price to quantity supplied.
[image] |
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| What does the 'Law of Supply' state? |
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Definition
| The law of supply states that there is a DIRECT (POSITIVE) RELATIONSHIP between price and quantity supplied. |
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Definition
P = c + mQ
- This will be an upward sloping straight line |
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| How do we find the equation of the supply schedule? |
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Definition
Find m by finding the slope = rise/run
Find c by plugging in two corresponding values of P and Q (values from the Supply Schedule) then solve |
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| What does Market Supply mean? |
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Definition
| Refers to the sum of all individual supplies for all sellers of a particular good or service |
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| How is Market Supply summed? |
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Definition
| Graphically, individual supply curves are summed HORIZONTALLY to obtain the market curve. |
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| What does a change in market price of the product cause |
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Definition
Change in QUANTITY supplied.
Movement ALONG the supply curve. |
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| Change in Quantity Supplied example |
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Definition
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| What are Determinants of Supply? |
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Definition
CENT
- COST OF PRODUCTION
- ENVIRONMENT: e.g. weather, the sunnier the more ice creams
- NUMBER OF SUPPLIERS: expect more supplies for an area with a larger population
- TECHNOLOGY: improved technology reduces cost of production |
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| Why do firms require a higher price to supply more? |
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Definition
Because eventually they expect the average cost curve to SLOPE UPWARDS.
E.g. in order to be induced to supply more, operations costs may increase. Therefore the firm would only supply more goods if the increased costs can be recovered. The only way to do this is by raising the price. |
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| Effect on Supply due to change in Technology example |
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Definition
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| What causes a change in SUPPLY? |
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Definition
| Caused by determinant other than price, causes a SHIFT in the supply curve, either to the left or right. |
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| What does the Equilibrium Price mean? |
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Definition
The price that balances supply and demand, and where the price of the two curves intersect.
- Means market is BALANCED
- There is no shortage or excess
- No left overs: no one misses out and no one receives more |
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[image]
Equilibrium price on table explanation |
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Definition
| There is no left overs. No one who is prepared to pay $8 misses out. However, anyone who is willing to pay less or more does miss out. |
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| What is the Equilibrium Quantity? |
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Definition
| The quantity that balances supply and demand. On a graph it is the quantity at which the supply and demand curves intersect. |
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| Market Equilibrium example |
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Definition
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| What can a company that is at the Market Equilibrium be called? |
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Definition
| A "well functioning market" |
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| What does Disequilibrium mean? |
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Definition
| The market is not at equilibrium |
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| Why may the market not be at equilibrium? |
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Definition
1. Shortage of goods = Excess Demand (indicates price is too low)
2. Surplus of Goods = Excess Supply (indicates price is too high) |
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| What can inventory stock indicate? |
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Definition
| Good indicator of whether the firm is producing too much or not enough goods and also of the state of the economy. |
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Definition
| When The price is higher than the equilibrium price which causes high supply but a low demand. Overproduction. |
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| Reason why price may be too high? |
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Definition
| Due to lack of agriculture e.g. Government states that farmers mist get $15 per kg of meat to protect the farmers, but demand decreases as customers will not want to pay that much. Farmers overproduce if prices are getting high. |
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| How far firms are short of satisfying demand (reasons why shops have sales ) |
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| Quantity firm is willing to sell - Quantity customers are willing to buy |
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Definition
| Quantity customers are willing to buy - Quantity customers are willing to sell |
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| How to find the Equilibrium price |
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Definition
Demand curve = Supply curve (in terms of Q)
Rearrange to find Q
Plug in Quantity to equation to find the Price of market equilibrium |
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