Definition
- Demand refers to Consumer’s willingness and ability to pay for goods and services.
- Supply refers to Producer’s willingness and ability to supply goods and services at the given price.
Difference between quantity demand and quantity supplied
- While demand and supply entails willingness and ability, quantity demanded and quantity supplied entails the amount of goods and services involved.
- Quantity demanded and price of a commodity are inversely proportional. This means as price of a commodity increases, the quantity demanded decreases. On the other hand, quantity supplied and price of a commodity are directly proportional.
Demand and supply curves’ movement and shift
- Producers are willing to supply more of a good when prices are high than at low prices.
- According to the above relationship, the demand curve is downward sloping while the supply curve is upward sloping.
- Using demand curve and supply curve, the price is usually on the y axis, and quantity demanded is on the x axis.
- There are several factors that affect demand and supply, and hence impacts either negatively or positively, the quantity demanded and quantity supplied.
- A change in the price of a commodity either upwards or downwards causes movement along the demand curve and supply curve.
- On the other hand, a change in any other non-price factor causes a shift in the demand curve or supply curve.
- Whenever the demand or supply decreases, the curve is said to have shifted to the left. If the demand and supply increases, the curve is said to have shifted to the right.
Revision
microeconomics
Study of a single factor of an economy – such as individuals, households, businesses, & industries – rather than an economy as a whole.
demand
Consumer willingness and ability to buy products.
supply
A schedule showing the amounts of a good or service that sellers (or a seller) will offer at various prices during some period
marginal utility
(economics) the amount that utility increases with an increase of one unit of an economic good or service
elasticity
A measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants
substitution effect
If a good becomes relatively more expensive than its substitutes, consumers will buy less of it.
unit elastic
a given change in price causes a proportional change in quantity demanded
change in quantity demanded
Movement alone the demand curve showing that the amount someone is willing to purchase changes when the price changes
change in quantity supplied
-anytime there is a change in price, there is a movement along the supply curve due to a price change; also called a change in quantity supplied
demand curve
A graph of the relationship between the price of a good and the quantity demanded
supply curve
A curve that shows the relationship between the price of a product and the quantity of the product supplied.
change in demand
a shift of the entire demand curve
change in supply
A change in the quantity supplied of a good or service at every price; a shift of the supply curve to the left or right.
complements
Two goods for which an increase in the price of one leads to a decrease in the demand for the other
Law of Demand
consumers buy more of a good when its price decreases and less when its price increases
Law of Supply
Holding all else equal, when the price of a good rises, suppliers increase their quantity supplied for that good
income effect
A change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product’s price.
inelastic
Describes demand that is not very sensitive to a change in price.
point of equilibrium
The point on a graph at which that supply and demand curves meet, so the quantity buyers want to buy equals the quantity sellers want to sell and the price buyers are willing to pay equals the price sellers are willing to take.
market equilibrium
Occurs in a market when all buyers and sellers are satisfied with their respective quantities at the market price
shortage
A situation in which the quantity demanded is greater than the quantity supplied.
surplus
A situation in which quantity supplied is greater than quantity demanded.
diminishing marginal utility
the principle that our additional satisfaction, or our marginal utility, tends to go down as more and more units are consumed
price
(Changes the quantity demanded or the quantity supplied on a supply curve) The amount of money that a buyer pays the seller for a particular item.
determinants of demand
Factors other than price that determine the quantities demanded of a good or service
determinants of supply
Anything other than price of the current item that influences production decisions, including cost of raw materials, cost of labor, level of technology used to produce, number of producers in the market, price of related products, and expected future price.
Terms in this set (27)
Original
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 subsitutes
