Supply,demand,consumer and producer surplus

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22 Terms

1
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What is demand?

Demand is the quantity of a good or service that consumers are willing and able to buy at a given price in a given time period.

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What is effective demand?

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What is derived demand?

Demand for a factor of production used to produce another good or service..

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What is an example of derived demand?

For example, steel-the demand for steel is linked to market demand for cars and construction of new buildings.

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What type of relationship is there between price of a good and demand in law of demand?

There is an inverse relationship between the price of a good and demand.

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Law of demand:

As price falls, we see an expansion/extension of demand

As price rises, we see a contraction of demand.

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What is the ceteris paribus assumption ?

When drawing a demand curve, economists assume all factors are held constant except one-the price of the product itself.

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What does ceteris paribus assumption allow us to do?


Allows us to isolate the effect of one variable on another variable.

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What does the demand curve show?

The inverse relationship between the price of an item and the quantity demanded over a period of time.

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What are the two reasons why more is demanded as price falls?

1.The income effect.

2.The substitution effect.

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What is the income effect?

When the price of a good falls, the consumer can maintain the same consumption for less expenditure;effectively,this increases ‘real income’.

Provided that the good is normal(i.e one for which demand rises, when income rises and when demand falls when income falls),some of the increase in real income is used to buy more.

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What is the substitution effect?

When the price of a good falls, ceteris paribus, the product is now relatively cheaper than an alternative and some consumers will switch their spending from the alternative good or service.

The more substitutes there are in the market and the lower the cost/inconvenience switching, the bigger the substitution effect is likely to be.

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What else can we think about how the Law of Diminishing Marginal Utility can help to explain the inverse relationship between price and quantity demanded?

As more of a good is consumed, the additional utility(satisfaction) from each extra unit consumed will fall.

Because consumers are assumed to be rational, they will not pay more for a good than the additional utility provides.

Therefore, price and quantity demanded are inversely related.

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Why are there shifts in a demand curve?

Due to changes in “non-price factors” i.e anything that might effect the demand for a good other than its price.

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How is an increase in demand represented in a demand curve?

By a shift to the right(an outwards shift) of the demand curve.

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How is a decrease in demand represented in a demand curve?

Is shown by a shift to the left(an inward shift) of the demand curve.

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Non price factors of changes in the conditions of demand:

Change in price of a substitute good or service(also known as goods in competitive demand)

Change price of complements(also known as products in joint demand)

Change in the real income of consumers

Changes in distribution of income: a more equal distribution of income can increase total demand because relatively poorer consumers spend a higher proportion of their income.

The effects of advertising and marketing to alter tastes and preferencesd

Interest rates

Change in the size and age structure of a population

Seasonal factors for some goods and services

Social and emotional factors affecting demand.

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What is joint demand?

When demand for one product is positively related to demand for related good or service.

Two complements are said to be in joint demand.

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What is an example of joint demand?

Fish and chips,iron ore and steel, apps for smartphones.

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What is composite demand?

Exists where goods have more than one use, and so an increase in the demand for one product leads to fall in supply of the other,

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What is an example composite demand?

When milk can be used for cheese,yoghurts,butter and other products including fertiliser.

Another example is land e.g. farmland can be developed in many different ways and urban land has different uses(houses, offices etc).

Oil is used in many industries such as plastics.

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