Unit 2: Supply & Demand

demand

behaviour of buyers; various quantities of a good/service the consunmer is willing + able to buy @ different possible prices during a particular time period

ceteris paribus

“all others things than price that can affect how much the ocnsumer is willing & able to buy are constant + unchanging”

demand curve

law of demand

law stating there’s a negative relationship b/w a good’s price & quanity demanded over a particular time period, ceteris paribus

market demand

total quantities in the market for good customers are willing + able to buy @ different prices

non-price determinants of demand (definintion)

variables besides price that can influence demand

NPDs of Demand (list)

• normal good - when demand increases in response to an increase in consumer income

• inferior good - when demand decreases in response to an increase in consumer income

• substitute goods - 2 goods satisfying a similar need

• complementary goods - two good tended to be used together

• number of consumers - a lot = increase D; little = decrease D

• preferences and tastes - good = increase D; bad = decrease D

supply

various quantities of a good/service a firm is willing + able to produce & supply to the market for sale at different possible prices, during a certain time period, ceteris paribus

supply curve

law of supply

positive relationship b/w the quantity of a good supplied over a particular time period and its price, ceteris paribus

market supply

sum of all individual firms’ supplies for a good

vertical supply curve

graph explaining that as price increases, quantity can’t change

• can happen due to fixed quantity b/c there’s no time to produce more (overselling tickets) or no possibility of producing more (vintage pieces)

non-price determinants of supply

factors besides price that can influence supply

NPDs of Supply (list)

• cost of factors of production - LLCE determining the firms’ costs of production; LLCE increase = prod. decrease = ← shift; LLCE decrease = prod. increase = → shift

• technology - new tech lowers costs of production = shift →

• competitve supply - when 1 firm produces 2 goods who use same resources

• joint supply -production of goods derived from 1 product

• producer price expectations: expect rise = withhold supply = shift ←; expect fall = increase supply = shift →

• subsidy - payments made to firm by government; subsidy increase = shift →; subsidy decrease = shift ←

• # of firms - increase in # = shift →; decrease in # = shift ←

• ‘shocks’ -sudden unpredictable events (ie. oil spill)

excess supply/surplus

when there are more products than what’s demanded

excess demand /shortage

when there is more demand than what’s been produced

equilibrium

state of balance b/w different forces, such that there’s no tendency to change

market equilibirium

when the quantity demanded = quantity supplied

equilibrium price

price in market eq.

equilibrium quantity

quantity in market eq.

competitive market equilibrium

quantity demanded = quantity supplied, w/ no tendency for price change

price mechanism

prices determined by forces of supply & demand in competitive markets

invisible hand of the market

mechanism coordinating the buying + selling decisions of 100s+ decision-makers in an gov’t w/o central authority

consumer surplus

highest price consumers are willing to pay for a good minue the price they actually paid

producer surplus

price received by firms for selling their goods – lowest price willing to accept w/ production

community surplus

sum of consumer surplus and producer surplus

welfare

amount of consumer and producer surplus

welfare loss

when markets fail to achieve allocative efficiency = decrease in social surplus