Supply and Demand

How does a market come to be (how does it exist?)

Through supply and demand.

What is effective demand?

The effective demand for a good or service is the quantity (Q) of the good or service that consumers are willing and able to buy at each price (P) over a period of time (t), all other things being equal (ceteris paribus).

Notional demand - Latent demand = effective demand

For a given price, what is the quantity demanded of sth by those willing and able, ceteris paribus, in a set period of time.

What is market demand?

It is the aggregate effective demand of all the consumers

What is the law of demand?

The law of demand states that there is an inverse relationship between the price of sth and the quantity demand of sth.

What is the real income effect (or just income effect)?

The real income effect is when consumers have to pay a higher price for sth, they less income left over to buy other things,

hence the quantity demanded of the thing with the increased price will drop.

What is the substitution effect?

The substitution effect is when an increase in price will cause consumers to be more likely to substitute the good with other goods. Other substitute goods become more attractive when the price of a good increases.

What are the non-price determinants of demand?

P.A.S.I.F.I.C

Population

Advertising

Substitute’s prices

Income

Fashions and trends

Interest rates

Complement prices

Difference between an expansion/contraction of demand and increase/decrease of demand, as well as how they are shown on a demand curve.

Expansion/contraction of demands refers to the change in quantity demanded when the price changes. This is a movement ALONG the curve.

Increase/decrease of demand happens when non-price determinants increase/decrease the quantity demanded of goods independent of price. This is shown in a shift of the curve.

Difference between an expansion/contraction of supply and increase/decrease of supply, as well as how they are shown on a supply curve.

Expansion/contraction of supply refers to the change in quantity supplied when the price changes. This is a movement ALONG the curve.

Increase/decrease of supply happens when non-price determinants increase/decrease the quantity supplied of goods independent of price. This is shown in a shift of the curve.

What is the snob effect?

The snob effect is when goods that are exclusive or are percieved as a status symbol are seen as being more valuable when their prices increase. The snob effect will contribute to an increase in quantity demanded despite the increase in price. Such goods demonstrate an upward sloping curve contrary to the law of demand.

Goods that exhibit the snob effect are called veblen goods

What are the 4 things a that determine an individual consumer’s demand?

Price

Price of the alternative

Income

Preferences

What is a normal good?

Normal goods are goods that will see an increase in demand if consumer incomes rise. Examples are holiday packages. This is due to the income effect.

What are inferior goods?

Inferior goods are goods that will see a decrease in demand if the incomes of people increase. Examples are public transport and takeaways. This is due to the substitution effect.

What is individual supply?

The quantity that a firm is willing and able to supply in a set period of time for a given price.

What is market supply?

The aggregate supply of all the firms on the market.

What are the differences between substitutes and complements?

Substitute products are products that consumers typically have to chose between. The products are considered as alternatives of each other. An increase in price of one will increase the demand of the other.

Complements are products that consumer typically consume together. The increase of price of one will decrease the demand of the other.

What is the law of supply?

There is a positive relation between the price and the quantity supplied of a good.

What are the non-price determinants of supply?

P.I.N.T.S.W.C.

Productivity (of the factors of productions)

Interest rates

No. of companies on the market

Technology

Subsidies and taxes

Weather

Costs of production