Demand- this is the amount of commodity people are willing and able to pay .
Supply-it is the quantity of a commodity that the sellers are wishing to put in the market at a given price and at a given time.
Market can either be described as locus of exchange or buyers and sellers coming together to perform transactions.
Law of demand.
It states that as the price increases the consumers will tend to purchase less of the commodity, also as the price of the commodity decreases the consumers will tend to buy more of the product.
Demand curve.
It shows the negative relation between the individual and the market demand.
It also shows nonprice determinant of demand. They include,
- Test and preference of the consumer.
- The number of consumers.
- The income level.
- Price of other related goods .
- Expectations of the consumer on future price.
It also shows the change in demand and the quantity demanded.
Supply curve.
It is a schedule of the quantities at each and every price .
It shows the positive relation between the price and the quantity.
It shows how a change in one or more of the nonprice determinants of supply cause the shift in the supply curve, they include,
- Prices of the resources .
- Taxes and subsidies.
- The price of other related products.
- Expectations of future prices of the commodity.
- The number of sellers in the market.
Market equilibrium.
Occurs when the supply of a commodity is equal to the quantity demanded of the product.
An equilibrium implies that there are no forces that will cause further change in the price of the commodity.
Change in the supply and demand in a market leads to a new equilibria.
Shortages and surplus.
They occur because of effective government intervention.
Shortages are caused by an effective price ceiling whereas surplus are caused by an effective price floor .
Law of supply.
It states that all the other factors remaining constant when the price of a commodity increases the supply of the commodity increases.
Revision.
supply
the willingness and ability to bring to market (produce/sell) specific quantities of a good or service at different prices in a specific time period, all things remaining the same
Demand
the willingness and ability to buy specific quantities of a good or service at different prices in a specific time period, all things remaining the same
What does the law of supply state?
The law of supply states that producers will increase the quanity supplied at higher prices and decrease the quantity supplied at lower prices, if everything else remains the same.
When graphing supply and demand, this is known as a change in quantity supplied
What does the law of demand state?
The law of demand states that people will buy more of a good or service at lower prices and less at higher prices, if everything else remains the same
When graphing, this is known as a change in quantity demanded
What is the effect of supply? How is represented graphically?
a change in the quantity supplied
What is the effect of demand? How is represented graphically?
a change in the quantity demanded
Determinants
factors (other than the price of the good or service) which can influence demand or supply
What are the determinants of supply? How does an increase/decrease in the determinant affect supply?
- changes in the prices of productive resources used to make the good or the service
- changes in the technology used to make the good or the service
- changes in the profit opportunities available to producers by selling other goods or services
- changes in the number of sellers in a market
- changes in the expectations of producers
When graphing, this is known as a change in supply
Complimentary Goods
goods that are related to each other: if the price of one increases the demand for the other falls and vice versa, for example petrol and cars
Substitute Good
products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises
What are the determinants of demand? How does an increase/decrease in the determinant affect demand?
- a change in consumers’ incomes
- a change in consumers’ preferences
- a change in the prices of related goods or services (complements or substitutes)
- a change in a number of consumers in a market
- a change in the expectation
When graphing, this known as change in a demand
What direction do supply and demand curves shift as a result of increases and decreases?
- Increase in supply = right
- Decrease in supply = left
- Increase in demand = right
- Decrease in demand = left
Equilibrium Price
the one price at which quantity supplied equals quantity demanded
What are the effects of supply/demand shifts on equilibrium price and quantity?
- Increase in supply = Decrease in price/Increase in quantity
- Decrease in supply = Increase in price/Decrease in quantity
- Increase in demand = Increase in price/Increase in quantity
- Decrease in demand = Decrease in price/Decrease in quantity
Surplus
when the price is set above the equilibrium price
What is the result of a surplus?
results in a price decrease
How do you calculate a surplus?
qs – qd = surplus
Shortage
when the price is set below the equilibrium price
What is the result of a shortage?
results in a price increase
How do you calculate a shortage?
qd – qs = shortage
What are the two most common forms of price control?
Price ceilings and price floors
What do the two forms of price control result in?
Price Ceilings – shortages
Price Floors – surplus
Elasticity
the degree to which buyers and sellers respond to price changes
How do you calculate elasticity?
(Q2-Q1)/[(Q2+Q1)/2] / (P2-P1)/[(P1+P2)/2]
What do the calculations of elasticity mean?
= 0 , Perfectly Inelastic
0 and < 1 , Relatively Inelastic
= 1 , Unit Elasticity
1 and < ∞ , Relatively Elastic
= ∞ , Perfectly Elastic
What are the determinants of supply elasticity?
- Availability of raw materials
- Available production capacity
- Time period required to produce more of the good or service
What are the determinants of demand elasticity?
- Necessity vs. luxury
- Proportion of income
- Number of substitutes
