economics (demand, supply, equilibrium)

demand

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