MANECON - Chapter 6 Supply and Demand

Demand

for a product is the quantity of a good that buyers are willing to buy.

Demand

The quantity consumers are willing and able to buy at each possible price during a given time period, other things constant

Law of Demand

As the price increases, the quantity demanded of the product decreases, but as the price decreases, the quantity purchased will increase

Law of Demand

All other things remaining constant, the quantity demanded of a good is inversely related to the price of that good

Law of Demand

consumer purchase more as price falls

Ceteris Paribus assumption

means that other determinants of demand are assumed to remain constant.

Ceteris Paribus assumption

says that none of the independent variable changes

Ceteris paribus

Latin for “all else being equal.”

Demand Function

shows  how the quantity demanded of a particular good responds to price change.

Demand Schedule

shows the different quantities that will be bought of good, given various prices.

Demand Schedule

A list of possible product prices and corresponding quantities demanded.

Demand Curve

A graphical representation of demand schedule and therefore contains the same prices and quantities in the demand schedule.

Demand Curve

A graph showing  relation between the quantity demanded and the price when all other variables influencing quantity demanded are held constant.

Aggregate or market demand curve

is the relationship between the price and the number of purchases made by this group of consumers

1. Income          

2. expectation of future prices  

3. prices of related goods like substitutes and complements

4. Size of population

5. quality of products

6. tastes and preferences

7. Promotion and/or advertisement

8. religion

9. customs/traditions

10. fad or fashion

Other factors (other than price) that influence the quantity of demand:

Supply

of a product is the quantity of goods that sellers are willing to sell

Supply

is how much the producers are willing and able to offer for sale per period at each possible price, other things constant.

Supply Function

shows how quantity offered for sale of a good is dependent on its determinants, the most important of which is the price of the good itself.

Supply Schedule

shows the different quantities that will be offered for sale at various prices

Supply Schedule

shows the different quantities that will be offered for sale at various prices.

Individual Supply Schedule

If  the quantities offered are only of one seller

Market Supply Schedule

The aggregate supply quantities of a group of sellers

Law of Supply

Quantity supplied is directly related to its price, other things constant

Law of Supply

states that “All other things remaining constant, the quantity supplied of a good is directly related to the price of the good.”

Law of Supply

Other things assumed as constant, price and quantity supplied are directly proportional.  

Supply Curve

is the graphical presentation of the supply schedule

1. Cost of Production

2. Availability of economic resources

3. Number of firms in the market

4. technology applied

5. Producer’s goals/motives

6. Taxes and subsidies

7. Prices of the product

8. Price expectation
   

Non-price factors or determinants of Supply:

Alfred Marshall

was responsible for introducing the very important Law of Demand and Supply

Equilibrium

means a state of balance. is  attained where demand is equal to supply

Equilibrium

It occurs when the price is at the level for which quantity demanded equals quantity supplied.

Equilibrium price

The price where demand and supply are equal

Equilibrium quantity

The quantity where demand and supply are equal

Market Equilibrium

is a situation in which, at the prevailing price, consumers can buy all of a good they wish and producers can sell all the good they wish.

Equilibrium Point

one point in the graph where the demand is exactly equal to supply

Surplus

Excess supply

Surplus

exists when the quantity supplied exceeds quantity demanded

Shortage

Excess demand

Shortage

exists when the quantity demanded exceeds quantity supplied demanded.

Ceiling price

the maximum price the government permits seller to charge for a good

Ceiling price

When this price is below the equilibrium

Floor Price

the minimum price the government permits sellers to charge for a good

Floor Price

When this price is above the equilibrium

Elasticity

is a measure of how much buyers and sellers respond to changes in market conditions

Elasticity

It allows us to analyze supply and demand with greater precision

Price elasticity of demand

is the percentage change in quantity demanded given a percent change in the price

Price elasticity of demand

It is a measure of how much the quantity demanded of a good responds to a change in the price of that good

Elastic

when a change in a determinant leads to a proportionately greater change in quantity of demand or supply

Elastic

The coefficient of elasticity is more than 1  ( > 1)

Inelastic

when a change in a determinant results in a proportionately lesser change in the quantity of demand or supply

Inelastic

The coefficient of elasticity is less than 1  ( < 1)

Unitary elastic

when a change in a determinant results in a proportionately equal change in the quantity of demand or supply

Unitary elastic

The coefficient of elasticity is equal to 1  ( = 1)

Price Elasticity

is the study if the responsiveness of demand to changes in the price of good.   

Price Elasticity

The concept depends on percentage changes

Price Elasticity

Its value may be computed by choosing two points on the demand curve and comparing the percentage changes in the quantities and the prices on those two points.

Income elastic

It is a study of the responsiveness of demand to a change in consumer income.  

Income elastic

It expresses the percentage change in demand compared to a percentage change in income.

Engels’s Law

When income increases, percentage that is spent for food tends to decrease

Engels’s Law

The resulting coefficient is less than one because food is a necessity

Engels’s Law

When income increases, the increase goes mostly to the purchase of luxury items, education, travel and leisure

Normal/Superior Goods

Income Elasticity is positive

Inferior Goods  

Income Elasticity is negative

Negative Income Elasticity

means that the goods are inferior, that is, as income increase, demand declines

Cross Elasticity

relates a percentage change in demand for a good with a percentage change in the price of another good

Positive cross-price elasticity

means that Good B is a substitute to Good A

Negative cross-price elasticity

means that Good B is a complement to Good A