Supply and demand

The price of goods is largely the result of two factors:

The quantity of goods available to purchase & the desire for goods among potential customers

What is the definition of demand?

what potential customers are willing and able to purchase for goods and services

As demand goes up prices…

Increase

As prices go up demand…

Decreases, as consumers may buy less.

What is the law of diminishing marginal utility?

states that as a consumer consumes more units of a good or service, the additional satisfaction (utility) gained from each subsequent unit decreases. (EX: Joe won’t buy a fifth taco if he is already full, even if it's only a dollar.)

What is the income effect?

describes how a change in a consumer's income affects their purchasing decisions. (EX: Joe had an unexpected repair bill this week, so he only has enough money for 3 tacos)

What is the substination effect?

The introduction of cheaper types of a product will either increase demand or allow a customer to mitigate the income effect. (EX: A taco truck shows up nearby using cheaper ingredients and only charging $1 per taco. This allows Joe to buy 5 tacos even with unexpected expenses)

What is the law of supply?

As price increases, supply increases.

• due to profits increasing, producers can invest in increased production

What is the definition of supply?

the amount of goods/services a producer is willing and able to sell at a certain price at a given time. The producer-centric aspect

What is equilibrium price and equilibrium quantity?

When prices increase past certain point demand decreases which forces producers to scale back supply

What is market supply?

the total amount of a given product/service as offered by all sources

What is profit factor?

Business goal of acquiring profit drives the decision of produce

• Runaway success of a product can temporarily create scarcity until the producer increases production

What is artificial scarcity?

When a producer intentionally limits the supply of a product/service in order to increase demand

What are market entries and exits?

As the price of goods/services increased it attracts more providers seeking profit

• Supply increases as a result

What is quality factor?

Assuming supply remains the same, the increase in the quality of a good/service causes an increase demand as well.

Consumer preference

The change in an individual or group idea of what is desirable.

What are reasons for change in consumer preference?

• Celebrity endorsement

• Ethical/moral considerations

What is technological innovation?

Advancements in production and transportation technology can increase supply and/or cause a drop in price

What is government manipulation?

That use of government action to either encourage or discourage the consumption of goods/service

What are some examples of government manipulation?

• Application of tariffs

• Excise Tax

What are natural conditions?

• When climate and weather contribute to the ability to produce/transport/store goods/services

• Can be somewhat mitigated by modern technology