Supply and demand

Define Demand

The relationship between the price of a product, and the quantity people want to buy.

Define the Law of Demand

as price increases, demand will decrease.

Give 3 reasons the demand curve is downwards slopping

Diminishing marginal utility, Income effect, substitution effect

Diminishing Marginal Utility

the price a consumer is willing to pay defers from the utility the consumer gains from consuming it.

Substitution effect

Occurs when prices fall, goods are relatively more attractive to buy than more expensive substitutes.

Income effect

As prices fall, cheaper goods increase the purchasing power of consumer's income as they are able to buy more.

2 names for movements along the supply or demand curve

extension and contraction

What factors shift the demand curve?

Fashion/Advertising, population, price and availability of substitutes, interest rates, consumer incomes.

Define Supply

The quantity of a good or service that a producer is willing to supply at a given price.

What factors shift the supply curve?

Costs of production, profitability of alternative products, technological advancements, taxes and subsidies.

Define Consumer Surplus

The difference between the price the consumer would be prepared to pay at and the price they actually pay.

Define Producer Surplus

The difference between the price the producer would be prepared to supply at and the price they actually supply at.

Define the Price Mechanism

The manner in which the price of commodities affect the supply and demand of goods and services.

What are the three features of the mechanism?

Signalling, incentive, rationing.

Define Rationing.

When there is a shortage of a product, price deters some consumers from purchasing.

Define Signalling.

Price changes provide producers and consumers information about changes in market conditions.