Economics Unit 2 supply and demand

Decrease in Demand

Decrease in Demand Shift to left

Things which change supply Natural disasters/ War- depletion of resources

Things which change supply Natural disasters/ War- depletion of resources Reduce productive potential capacity

Movement along supply curve

Movement along supply curve Extension→price up, quantity supplied upContraction→price down, quantity supplied down

Taxes

Taxes Financial payment which increase cost of production and reduce their financial incentive (profit)

Extension in supply

Extension in supply price up, quantity supplied up

Demand curve

Demand curve shows inverse relation in between price and quantity demanded

Things which change supply Increase in Subsidies

Things which change supply Increase in Subsidies Decrease cost of production, increasing supply

Contraction in supply

Contraction in supply price down, quantity supplied down

Things which change demand Price of substitute

Things which change demand Price of substitute Products which can be used instead of each other, increased price of substitute good will lead consumers to switch to cheaper alternative, e.g coffee and tea

Things which change demand Successful advertising

Things which change demand Successful advertising Positive affects of consuming productNegative effects of consuming productraises awareness of consumers

Market Supply

Market Supply total supply of a product, supplied by all firms

Shortage

Shortage More demand less supply

Supply shifts

Supply shifts Increase in supply→A rightward shift of the supply curveDecrease in supply→Leftward shift of the supply curve

Things which change demand Interest Rate

Things which change demand Interest Rate Decreased interest rate will cause decrease in cost of borrowing, decrease in reward for saving, increase in borrowing decrease in saving increase in spending, increase in demand.

Quantity Supplied

Quantity Supplied The amount of a good or service that producers are willing and able to sell at a given price level

Price mechanism

Price mechanism price determined by market forces of supply and demand. Resources move automatically as a result of change in price.

Things which change demand (6)

Things which change demand Income→amount earned from working or providing factors of production, more income leads to more purchasing power increasing ability to buy product

Population→more people will buy the product

Price of substitute→Products which can be used instead of each other, increased price of substitute good will lead consumers to switch to cheaper alternative, e.g coffee and tea

Price of complementary Product→are jointly demanded

Interest Rate→Decreased interest rate will cause decrease in cost of borrowing, decrease in reward for saving, increase in borrowing decrease in saving increase in spending, increase in demand.

Successful advertisingPositive affects of consuming productNegative effects of consuming productraises awareness of consumers

Analyse using a demand and supply diagram how x will affect the market for y

Analyse using a demand and supply diagram how x will affect the market for y If a happens b will happenThis will lead to an in/de crease of d or s and shift to the right/left which will in/de crease price and quantity

Subsidies

Subsidies Financial payment by government to reduce cost of production

Supply Curve

Supply Curve Shows direct relationship between quantity supply and price

Price

Price The amount that a buyer gives to a seller for a good or service

Movements along the demand curve

Movements along the demand curve Contraction→price up, quantity demanded downExtension→price down, quantity demanded up

Increase in Demand effect on Demand curve

Increase in Demand Shift to right

Quantity demanded

Quantity demanded The amount of a product demanded at a given price

Things which change demand Price of complementary Product

Things which change demand Price of complementary Product are jointly demanded

Supply schedule

Supply schedule Table used to make supply curve

Disequilibrium

Disequilibrium Supply and demand are not equal. Either excess demand or supply. Market is not clear.

Demand

Demand willingness and ability of buyers and consumers to buy a product at each price

Market demand

Market demand total amount demanded by consumers

Things which change supply Increasing taxes

Things which change supply Increasing taxes Increases costs of production, reduce financial incentive as there will be less profit decreasing supply.

Things which change demand Income

Things which change demand Income amount earned from working or providing factors of production, more income leads to more purchasing power increasing ability to buy product

Demand schedule

Demand schedule Table used to draw demand curve

How does a market move from Disequilibrium to equilibrium

How does a market move from Disequilibrium to equilibrium If it is below equilibrium- excess supply less demand, there would be a decrease in price to increase demand and reduce supplyIf it is above equilibrium- excess demand less supply, there would be an increase in price to increase supply and reduce demand

Things which change supply Discovery of New Resources

Things which change supply Discovery of New Resources Increases productive potential capacity

Demand shifts

Demand shifts Increase in Demand→Shift to rightDecrease in Demand→Shift to left

Supply shifts Increase in supply

Supply shifts Increase in supply A rightward shift of the supply curve

Supply

Supply The willingness and ability of firms to sell goods and services at each prices.

Surplus

Surplus More supply less demand

Things which change supply Weather and Climate

Things which change supply Weather and Climate good weather conditions- increase crop yield

Things which change supply (7)

increase in cost of production→firms will have to pay more to produce the product decreasing supply

Increased advanced technology→Increase in efficiency and productivity, decrease average cost, increasing supply

Increasing taxes→Increases costs of production, reduce financial incentive as there will be less profit decreasing supply.

Increase in Subsidies→Decrease cost of production, increasing supply

Natural disasters/ War- depletion of resources→Reduce productive potential capacity

Discovery of New Resources→Increases productive potential capacity

Weather and Climate→good weather conditions- increase crop yield

Market

Market where demand meets supply

Cost

Cost The amount that a firm gives to produce the product

Things which change demand Population

Things which change demand Population more people will buy the product

Things which change supply Increased advanced technology

Things which change supply Increased advanced technology Increase in efficiency and productivity, decrease average cost, increasing supply

Contraction in demand

Contraction in demand price up, quantity demanded down

Movements along the demand curve Extension

Movements along the demand curve Extension price down, quantity demanded up

Equilibrium

Equilibrium quantity supply meets quantity demand. Market is clear

Individual Demand

Individual Demand Demand of one consumer

Supply shifts Decrease in supply

Supply shifts Decrease in supply Leftward shift of the supply curve

Things which change supply Increase in cost of production

Things which change supply Increase in cost of production firms will have to pay more to produce the product decreasing supply

Individual Supply

Individual Supply Supply of one firm

Price Elasticity of Demand

(%Δq.d)/(%Δp)

Elastic Demand

A percentage change in price will lead to a greater percentage change in q.d and PED for demand is more than 1.

Inelastic Demand

A percentage change in price will lead to a smaller percentage change in q.d and PED for demand is less than 1.

What is meant by a PED of x

(In)elastic Demand, a 1% increase in price will lead to a x% decrease in quantity demanded.

Perfectly Inelastic Demand

A percentage change in price will lead to no effect on quantity demanded, PED is 0

Perfectly Elastic Demand

A percentage change in price will lead to a infinite change in quantity demanded, PED is infinite

Unitary Demand

A percentage change in price will lead to the same percentage change in q.d, PED = 1

Revenue

Price x q.d/ q traded/q.s

Profit

Revenue - Cost of Production

Consumer Expenditure

Amount spent by the consumer

In Elastic PED should how can they increase revenue?

Decrease Price

In inelastic PED how can they increase revenue

Increase Price

Determinants of PED (5)

Availability of Substitutes Whether product is luxury or necessity Proportion of income spent on Product Time Period Addictive / habit buying

Availability of Substitutes

Consumers can switch to the cheaper alternative of the product

Proportion of Income spent on Product

Is price is a large proportion of income, consumers will notice the rise in price more.

Period of time (PED)

If consumers have a long period of time to adjust their demand, it will be easier to postpone buying the product

Necessity or Luxury

If people need it it will be inelastic demand

Addictive/ Habit buy (PED)

People less willing to alter demand

Any question relating the price elasticity of demand and a business

Price Elasticity definition Helps firms decide Pricing strategy 2 types of PED Elastic Demand def + examples + how to increase revenue Inelastic Demand def + + example + how to increase revenue

How PED changes along a straight line demand curve

Price Elasticity of Supply

(%Δq.s)/(%Δp)

What is meant by a PES of x

(In)elastic supply, a 1% increase in price will lead to a x% increase in quantity supplied

Elastic Supply

A percentage change in price will lead to a greater percentage change in q.s and PES is more than 1.

Inelastic Supply

A percentage change in price will lead to a smaller percentage change in q.s and PES is less than 1.

Perfectly Inelastic Supply

A percentage increase in price will lead to no percentage increase in q.s, PES = 0

Perfectly Elastic Supply

A percentage increase in price will lead to an infinite percentage increase in q.s, PES = infinite

Unit PES

PES= 1, a percentage increase in price leads to the same percentage change in q.s

PES determinants (4)

The time it takes to produce the product Degree of spare productive capacity Product that can be stored Level of Stocks

Production period in PES

If it is decreased it will make it easier to alter the quantity produced- elastic supply

Product Storage PES

If it has longer storage, it would be easier to bring more products onto the market or withdraw them from the market- elastic supply

Level of stocks PES

Amount of finished goods or inventory ready for sale, if it is more then more elastic PES as production can be adjusted without increasing costs.

Degree of spare productive capacity PES

If there is plenty of spare productive capacity, supply can be increased without increasing cost - elastic supply.

Definition of a market economic system

Only private sector, no government intervention, price changes determined by market forces of supply and demand

Advantages of market economic system

Consumer sovereignity Competition Wide variety of choices of products made Price signals

Advantage of Consumer Sovereignity Explained

Consumers determine what is produced and firms respond to changes in consumer demand

Advantage of Competition Explained

Increases efficiency, leading to lower costs so lower prices and high quality

Advantage of Wide variety of products produced Explained

Increasing standards of living

Advantage of Price signals Explained

price will indicate which products to produce as there is profit incentive

Disadvantages of market economy (5)

Poor consumers have little influence on what is produced

Monopoly may occour Income and wealth might be unequally distributed

Market failure may occur

Demerit goods overproduced and overconsumed Merit goods underconsumed and underproduced

Public goods not produced

Explain disadvantage on market economy due to Poor consumers

low influence as they have little income so low purchasing power

Explain disadvantage on market economy due to Monopoly

Charge high prices and reduces quality

Explain disadvantage on market economy due to market failure

Market forces failing to ensure the maximum benefit to the society as consumers and producers take into account their own private benefit and cost

Explain disadvantage on market economy due to demerit goods overcomsumption and over production

Have external cost

Explain disadvantage on market economy due to merit goods under consumption and under production

they have external benfits

Explain disadvantage on market economy due to Public goods not being produced

for example national defence not produced due to private firms not having financial incentive to produce

Possible benefits of consumers due to market economy

High Quality Lower Price Wide variety of goods and services

Social Cost/Benefit

Total cost/benefit to society, Private cost/benefit plus external cost/benefit

Private cost/Benefit

The costs/benefit to those directly producing or consuming the product . Social cost/benefit - External Cost/benefit

Examples of Private costs to comsumer

Price of product