Topic 2 - Economics (Demand & Supply) FULL

REVISION

What is a market?

Is a place or system where buyers and sellers meet to decide what, how, and how much to produce, based on changes in price.

What determines what is produced and sold in a market?

Market forces (the demand & supply of goods/services)

What shapes consumer purchasing decisions? (3)

• Income

• Comparative prices

• Accumulated wealth

Define demand.

The quantity of a good consumers are willing and able to purchase at each price during a particular time period

What is the Law of Demand?

As price increases, quantity demanded decreases (and vice versa)

Name a key factor that determines demand for a good or service

Price

What is a demand curve

A graph that shows how much people want to buy at different prices.

Why is the demand curve downward sloping?

Because price and quantity demanded move in opposite directions.

What causes a movement along the demand curve

Price only

What causes a shift in the demand curve? (e.g. 3)

Any factor other than price, such as (Income, price of other goods, taste / preferences, wealth, climate)

What is the difference between movement and shift

• Movement = happens when price changes, causing the curve to move either up or own

• Shift = happens when something other than price changes - shifting the curve to a new position

What is a Veblen good?

A luxury good where higher prices make it more desirable due to status and exclusivity

Other term for “Veblen good”

Snob good

What is a Giffen good?

A rare inferior good that people buy more of when the price goes up. It has no close substitutes because people cant afford better alternatives (e.g. medication, bread, rice)

Factors affecting demand (6)

• Level of disposable income

• Price of other goods / services (substitutes / compliments)

• Changes in marketing policies and advertising campaigns

• Expectations for future market conditions

• Consumers taste & preferences

• (Other factors)

What are the other factors affecting demand ?

• Weather

• Population

How does income affect demand? (2)

• Normal goods: demand rises when income rises.

• Inferior goods: demand falls when income rises.

How can the price of other goods / services affect demand - with example (2)

• If price of one substitute rises, the demand of the other increases (e.g. Pepsi & Coke)

• If price of one compliment good increases, demand of the other decreases (e.g. tennis & tennis racket)

What are substitutes? - with example

Goods that can be used instead of the other (e.g., rail vs bus). If the price of one rises, demand for the substitute rises.

What are complements? - with example

Goods consumed together (e.g., cereal & milk). If the price of one rises, demand for the complement falls.

How would changes in marketing policies and advertising campaigns affect demand (2)

• If marketing campaign is a success, demand may increase

• Ad campaign for products like cigarettes / alcohol, can be used to reduce demand

How do tastes and preferences affect demand? (4)

Fashion, seasons, trends, and social attitudes can increase or decrease demand.

How do expectations for future market conditions affect demand? - with example (2)

• If future prices are expected to rise → current demand increases. (e.g. If future value for Gold increases, current demand increases)

• If future prices are expected to fall → current demand decreases. (e.g. Apple launching a new iPhone causing previous phone going down in price)

How does population affect demand? (2)

Larger population → higher demand;

Smaller population → lower demand.

How does weather affect demand ? (2)

Changes in climate conditions

• Cold / rainy seasons = demand for umbrella / jackets increase

• Hot / humid season = demand for ice-cream / cold drinks increase

Define supply.

The quantity of a good / service that sellers are willing to offer at each price for a specific duration.

What is the Law of Supply?

As price increases, quantity supplied increases; as price decreases, quantity supplied decreases.

Why is the supply curve upward sloping?

Higher prices make production more profitable, allowing firms to cover extra costs.

What causes a movement along the supply curve

A change in price (ONLY)

What causes a shift in the supply curve? (6)

• Number of producers

• Technology

• Cost of production

• Government regulations (taxes/subsidies)

• Weather

• Unpredictable events

How does the number of producers affect supply? (2)

• More producers → supply increases (rightward shift).

• Fewer producers → supply decreases (leftward shift).

How does technology affect supply?

Better technology increases supply by improving efficiency.

How do input costs affect supply (2)

• Higher costs → supply decreases.

• Lower costs → supply increases.

How do taxes and subsidies affect supply? (2)

• If tax increase → supply decreases.

• If subsidies increases → supply increases.

What are subsidies

Is a sum of money the government provides to producers to streamline production levels.

How do expectations affect supply? (2)

• If future prices are expected to fall → current supply increases (they do this to gain more profit now than later)

• If future prices are expected to rise → current supply decreases.

How does weather and unpredictable events affect supply?

Weather, natural disasters, war, and terrorism can reduce supply.

What is quantity demanded?

The amount consumers are willing to buy at a specific price.

What is demand?

The entire relationship between price and quantity demanded (the whole curve).

What is quantity supplied?

The amount of good / services producers are willing to supply at a specific price.

What is supply?

The entire relationship between price and quantity supplied (the whole curve).

What does a rightward shift in demand mean?

Increase in demand at every price.

What does a leftward shift in demand mean?

Decrease in demand at every price.

What does a rightward shift in supply mean?

Increase in supply at every price.

What does a leftward shift in supply mean?

Decrease in supply at every price.

If the price of a substitute rises, what happens to demand?

Demand for the original (other) good increases.

If wages increase, what happens to supply?

Supply decreases (higher production costs).

If income rises, what happens to inferior goods?

Demand decreases.

With example, explain why the demand of inferior goods decreases when income increases

Because people can finally afford getting better alternatives now that their income increased. (e.g. demand for instant noodles decrease when income increases)

A movement along the supply curve is caused by…

A change in price.

True or False

A shift in the demand curve can be caused by price

False

Define demand schedule

Is a table that businesses use to see how much of a product consumers are willing to buy at different prices over a specific time period. They use the info to help set their prices.

Define supply schedule

Is a table that shows how much producers are willing to sell at different prices over a specific time period