Unit 2, Supply and demand, and market equilibrium

Demand

The quantity of a good or service that consumers are willing and able to buy at different prices per period of time, ceteris paribus

Law of Demand

There is an inverse relationship between price and quantity demanded. As the price increases, the quantity demand decreases, and vice versa.

Notional demand

The quantity of a product that consumers are willing, but may not be able to buy at different prices during a given period of time, ceteris paribus

Effective demand

Notional demand that is supported by the ability to pay

Income effect of a price change

The change in quantity demanded of a good or service resulting from a change in real income due to a price change, affecting consumers' purchasing power.

Substitution effect of a price change

The change in quantity demanded for a good or service caused by a change in its price relative to the price of substitute goods, leading consumers to switch preferences.

Contraction of demand

A decrease in quantity demanded of a good or service due to an increase in its price, leading consumers to purchase less, represented by a shift to the left along the demand curve

Expansion of demand

An increase in quantity demanded of a good or service resulting from a decrease in its price, leading consumers to purchase more, represented by a shift to the right along the demand curve.

Increase in demand

An increase in quantity demanded of a good or service at every price level, caused by factors other than price. This is represented by a rightward shift of the demand curve.

Decrease in demand

A decrease in quantity demanded of a good or service at every price level, caused by factors other than price. This is represented by a leftward shift of the demand curve.

Factors affecting demand

PASIFIC, population, advertising, substitute’s price, income, fashion/tastes, interest rates, complement’s price

Market demand

The total quantity of a good or service that all consumers are willing and able to purchase at various price levels in a given market, ceteris paribus

Supply

The quantity of a product that producers are willing and able to sell at different prices within a given time period, ceteris paribus

Law of supply

There is a direct relationship between price and quantity supplied. As price increases, quantity supplied increases, and vice versa.

Extension of supply

Increase in the quantity of a product that producers are willing to sell in response to a price increase, shown as movement to the right along the supply curve

Contraction of supply

Decrease in the quantity of a product that producers are willing to sell in response to a price decrease, shown as movement to the left along the supply curve.

Increase in supply

Increase in quantity supplied of a good or service at all price levels due to factors other than price, represented as a rightward shift of the supply curve.

Decrease in supply

Decrease in quantity supplied of a good or service at all price levels due to factors other than price, represented as a leftward shift of the supply curve.

Factors affecting supply

PINTSWC, Productivity, Indirect Tax, No. of firms, Technology, Subsidy, Weather, Cost of production

Normal good

A good whose demand increases as consumer incomes rise

Inferior good

A good whose demand decreases as consumer incomes rise.

Subsitute

A good that can replace another in consumption, leading to an increase in demand for one when the price of the other rises.

Complement

A good that is typically consumed together with another good, where an increase in the price of one leads to a decrease in the demand for the other.

Joint demand

When two goods are consumed together, where an increase in the price of one good decreases the demand for the other

Alternative demand

When two goods are consumed in place of each other, where an increase in the price of one good raises the demand for the other.

Subsidy

A direct payment from the government to a producer to lower their costs of production and encourage them to produce more

Indirect tax

A tax imposed on goods and services that raises production costs, leading to higher prices for consumers.

Productivity of labour

Output per worker per time period

Market Equilibrium

A situation where demand is equal to supply in a market, and hence there is no tendency to change in price or quantity. This results in allocative efficiency.

Market disequilibrium

A situation where demand and supply are not equal in a market, and hence there is a tendency for price or quantity to change.

Equilibrium price

The price where demand and supply are equal, where the market clears

Functions of price

ARSI, Allocate scarce resources, Ration scarce resources by encouraging / discouraging consumption, Signal excess demand / supply and need for more or less resources, Incentivise producers to increase or decrease output to increase profit, (acts in order SIRA)

Result of excess demand

Can lead to shortages in the market, leading to price increases

Result of excess supply

Can lead to surpluses in the market, resulting in price decreases.

Derived demand

The demand for a good or service that arises from the demand for another related good or service.

Joint supply

When two items are produced together