Demand and Supply

What does the demand curve illustrate?

The relationship between quantity demanded and price of a good.

Why does the demand curve slope downwards?

Because as price increases quantity demanded decreases (law of demand)

What are the 5 non-price determinants of demand?

- Income

- Price of substitue / complement goods

- Tastes and preferences

- Future expectations of price

- Number of consumers

Define substitute good

Two goods in competitive consumption where consumers buy one or the other to satisfy the same need or want

Define complement good

Two goods jointly consumed

What happens to demand for normal goods and inferior goods when income increases?

- demand for normal goods increases

- demand for inferior goods decreases (as people can afford better quality products)

Vise versa for decrease in income

Define supply

Relationship between possible price of a good and the corresponding quantities firms are willing and able to supply per time period, ceteris paribus

Define law of supply

Relationship between price and the quantity supplied is direct (positive) - as price increases quantity supplied decreases and vice versa

What does the supply curve show?

Shows the relationship between the price of a good and and the quantity supplied over a given period of time

Why is the supply curve upwards sloping?

Due to the direct relationship between price and quantity supplied

What are the 6 non price determinants of supply?

- Change in FOP cost

- Price of related goods

- Indirect taxes and subsidies

- Future expectations

- Changes in technology

- Number of firms

What happens to the curve when price determinants change?

The curve shifts inwards / outwards

- When demand/supply increases, the curve shifts outwards where more quantity is demanded/supplied at each price

- When demand/supply decreases, the curve shifts inwards where less quantity is demanded/supplied

What happens when there is a change in price?

There is a shift ALONG the curve. These are contractions and extension.

What are the price determinants under ceteris paribus?

Constant / unchanging