2.1 the market economy

Law of demand

A negative relationship where as price increases quantity demanded decreases and vice versa

What causes changes in demand?

Future expectations

Unplanned Events

Substitute goods change price

Taste or preferences of consumers change

Income levels

More demand causes a shift to the..

Right

Less demand causes a shift to the..

Left

Exceptions to the law of demand

Snob goods

Speculative goods

Addictive goods

Snob goods

When price decreases quantity demanded decrease as they loose their exclusivity

Speculative goods

When price increases quantity demanded can increase as consumers expect the price will continue to rise

Addictive goods

As price increase quantity demanded does not decrease as addicts no longer act rational

Law of supply

A positive relationship as price increase so does quantity supplied and vice versa

More supply causes a shift to the…

right

Less supply causes a shift to the…

left

What causes a change in supply

Cost of production
Unplanned factors
Technological change
Selling price of similar goods
Sellers in the market increase in number
Taxation

Exceptions to the law of Supply

Minimum market price

Limited capacity

Fixed supply

Minimum market price, exception to law of supply

Some goods have a minimum price that can be charged for them, this is so firms can cover all their costs. But sometimes it is because of legal reasons, e.g. MUP

Supply restricted by limited capacity

Supply may be restricted by factors outside of firms control. Firms can reach their maximum productive capacity

Fixed/perfectly inelastic supply

When supply of a product cannot be changed in the shortrun

Excess Supply

When price is set above equilibrium price there is a downward pressure on price

Excess Demand

When price is set below equilibrium there is an upward pressure on price

How demand returns to equilibrium from excess demand

As there is a upward pressure on price, price increase, thus quantity supplied rises and quantity demanded falls. This process continues till equilibrium is reached where quantity demanded and quantity supplied are equal and there is no tendency for price to change

How supply returns to equilibrium from excess supply

As there is a downward pressure on price, price falls, thus quantity supplied falls and quantity demanded rises. This process continues till equilibrium is reached where quantity demanded and quantity supplied are equal and there is no tendency for price to change

Producer surplus

The difference between the lowest price a supplier is willing to accept and the price they received for supplying the good or service

Consumer surplus

The difference between what the consumer paid for the product and the maximum price that they are willing to pay for it rather than go without the product

Price mechanism

The decisions of consumers and businesses to interact and determine the allocation of resources

Examples of how the price mechanism works

Signalling

Preferences/tastes

Rationing

Demand

The number of units of goods and services a consumer will buy at various prices

Individual demand

The quantities of a good that an individual consumer is prepared to buy at various prices

Market demand

The quantity demanded for a good or service by all consumers in the market at various prices

Notional demand

When a consumer wants to purchase a commodity, but lacks the financial means to back up this demand

Effective demand

When a consumer wants to purchase a commodity and has the financial means to back up this demand