Studied by 15 peopledemand
the willingness and ability to purchase a good or service
law of demand
if prices go up, demand will go down. if prices go down, demand will go up.
demand curve
represents the utility one gets when consuming a good or service
individual demand
each of us have our own level of demand for a good or service
market demand
sum of all individual demand for a good or service
change in quantity demanded
a change in price leading to movement along the demand curve
change in demand
a change in demand due to a non price determinant leads to a shift in demand
normal good
a good that consumers prefer to purchase if their income allows it
inferior good
less desirable, cheaper good that consumers may purchase when incomes are low
non price determinants of demand
T- tastes and preferences I- income M- market size E- future price expectations R- related goods
income (demand)
non price determinant of demand when incomes goes up, demand for normal goods goes up and demand for inferior goods go down
future price expectations (demand)
non price determinant of demand if consumers think that prices are going to go up in the future they will purchase now. if consumers think that prices are going to go down in the future they will purchase later
related goods (demand)
non price determinant of demand if price of a complement goes down, demand for your good will go up. if price of a substitute goes down, demand for your good will go down
complement
goods that are purchased and used together
substitutes
goods used in place of another good (not inferior)
market size (demand)
non price determinant of demand if there is an increase in population or consumers then demand will go up. if there is a decrease in population or consumers then demand will go down.
tastes and preferences (demand)
non price determinant of demand advertisements and influences can impact demand. seasonal changes increase demand for some goods. changes in population's age structure. government policies can change demand.
supply
the willingness and ability of producers to produce a good or service
law of supply
as prices go up, supply goes up. as prices go down, supply goes down.
supply curve
represents the costs to a firm producing the good or service
individual supply
the willingness and ability for one firm to produce a good or service
market supply
the willingness and ability for all firms within a market to produce a good or service
non price determinants of supply
S- subsidies (changes in costs of factors of production) T- technology O- other related goods R- resource costs E- expectations S- size of market
resource costs (supply)
non price determinant of supply if costs go down then profits go up if costs go up then profits go down
cost
price of the resources that firms use to make a good or service
factors of production
land, labor, capital, and entrepreneurship
price of related goods (supply)
non price determinant of supply if price of a good with joint supply goes up, then supply will go down if price of a good with competitive supply goes up, then supply will go down
joint supply
when two or more goods are made from the same product
competitive supply
when the same producer can produce two or more different products
indirect taxes and subsidies (supply)
non price determinant of supply indirect taxes raise costs of producer, causes supply to decrease subsidies lower costs of producer, causes supply to increase
indirect taxes
tax placed on the production of a good or service by the government
subsidies
payments by the government to a producer
future price expectations (supply)
non price determinant of supply If suppliers think that prices will go up in the future, then they will reduce supply today If suppliers think that prices will go down in the future, then they will increase supply today.
changes in technology (supply)
non price determinant of supply if improved technology reduces the costs of producers, then supply will increase
number of firms (supply)
non price determinant of supply if the number of firms producing a good or service decrease then supply will decrease if the number of firms producing a good or service increase then supply will increase
change in quantity supplied
change in price leads to movement along the supply curve
change in supply
change in supply due to a non price determinant leads to a shift in supply
equilibrium
where supply meets demand, determines the quantity and price of a good, answers two of the basic economic questions of who gets the good or service and what is produced
equilibrium price
where quantity supplied is equal to quantity demanded, no surplus and no shortage
price rationing
free markets use prices to decide who gets the good or services
utility
satisfaction gained by consumers when they consume a good or service
consumer surplus
extra utility gained by consumers when paying a price lower than they were willing to pay
producer surplus
benefit producers receive when they receive a price above the one which they were willing to supply the good
community surplus
consumer surplus + producer surplus
marginal private benefit (MPB)
the utility consumers get when consuming one more unit of a good d = mpb always
marginal social benefit (MSB)
the total benefit to society from consuming one more unit of a good d = msb IF the good or service doesn't harm or benefit a third party when consumed
marginal private cost (MPC)
the cost to a firm from producing one more unit of a good s = mpc always
marginal social cost
the cost to society of producing one more unit of a good s = msc IF the production of the good or service doesn't harm or benefit society when produced then there is no further cost to society as a whole
allocative efficiency
when the cost to society equals the benefit to society MSC = MSB resources are allocated in the most efficient way from societies POV community surplus is maximized the argument for a market economy
arguments for a free market
allocative efficiency freedom of choice variety of goods prices and wages are set by supply and demand innovation keeps prices low
signalling and incentive function
increase in price is the SIGNAL chance to make greater profits is the INCENTIVE to increase supply
reallocation in a free market
disequlibrium which leads to excess demand, leads consumers to pay a higher price for the good or service, suppliers see the increase in price and begin to increase supply which is the signalling and incentive function movement along the supply curve as suppliers increase prices and supply, as price goes up, demand goes down, movement along a new demand curve until a new equlibrium is reached
assumptions underlying the demand curve
substitution effect income effect law of diminishing marginal utility
substitution effect
if price of a good goes down, consumers will switch from other substitute goods to this good because the price is comparatively lower
income effect
if prices go down, then our real income (income that is adjusted to price changes) has increased because we can buy more goods and services. we feel wealthier and tend to buy more of the same goods or services
law of diminishing marginal utility
as we consume additional units of something, the utility we derive from each unit decreases
assumptions underlying the supply curve
increasing marginal costs law of diminishing marginal returns
increasing marginal costs
when increasing the output of a good or service marginal costs (the cost of producing one more good or service) will go down at first, and then go up because of the law of diminishing marginal returns
law of diminishing marginal returns
at first when you add labor the output per worker will go up, but if you keep hiring workers the ouput per worker will go down
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