Economic Issues, Demand and Supply

ECON127 L1

What type of choice do customers make?

Rational - the most satisfactory option among alternatives based on preferences.

How do you make choices in economics?

Making choices involves evaluating available options based on preferences, COSTS, and BENEFITS to maximize satisfaction or utility. Also, trying to make the best use of limited resources.

What is opportunity cost?

What you give up for choosing something. The cost of one good measured in the terms of what we must sacrifice to consume.

What is the most efficient in an economy?

Maximising profit whilst minimising cost.

What is microeconomics?

Microeconomics is the branch of economics that studies the behaviour and decision-making of individuals, households, and firms in allocating scarce resources.

What is macroeconomics?

Studies the behaviour and performance of the economy as a whole. The collectives outcomes of individual interactions.

What is DEMAND and the LAW of DEMAND?

• The relationship between quantity demanded and price.

• The law of demand: negative relationship between the quantity demanded and price. Higher price = Lower demand.

Two effects that explains this law of demand

• Income effect - The change in price affects consumers’ real income. (as prices rise then the real income would be smaller)

• Substitution effect - price change affects the relative price of alternatives. (people are more likely to choose the cheaper alternatives if price is too high so therefore demand is lower)

Real vs Nominal Income

Nominal income - the income (£5 etc)

Real income - the goods and services you can buy with your nominal income (5 bottles of water)

What does the demand graph/curve show and look like?

The axes - demand (x) and price (y)

How much is demanded at each price per item.

Other reasons for a higher/lower demand

• tastes

• number and price of substitute goods

• number and price of complementary goods

• income

• distribution of income

• expectations

The movements along and shifts in the demand curve

• ALONG the curve - change in price ( up or down )

• SHIFT in curve - change in any other determinants (increase in demand (right), decrease in demand (left))

What is SUPPLY?

the relationship between supply quantity and price.

• as selling price rises, firms supply more as it is worth getting more units, develop a business, switch to better quality, more firms entering the market.

What does the supply graph/curve show and look like?

the axes - supply (x), price (y)

positive relationship

how much would be supplied at each selling price

Other reasons for a higher/lower supply

• costs of production

• profitability of alternative products

• profitability of goods in joint supply

• nature and other random shocks

• expectations of producers

The movements along and shifts in the supply curve

• ALONG the curve - change in price ( up or down )

• SHIFT in curve - change in any other determinants (increase in supply (right), decrease in supply (left))

Determining the price of goods

At equilibrium of supply and demand - no surplus/ shortage (intersection of both curves)

When above equilibrium - surplus so price falls

When below equilibrium - shortage so price rises

The effects of shifts in the DEMAND curve

the movement along the SUPPLY curve creates a new DEMAND curve

• rise in demand (right) - price rises

• fall in demand (left) - price falls

The effects of shifts in the SUPPLY curve

the movement along the DEMAND curve creates a new SUPPLY curve

• rise in supply (right) - price falls

• fall in supply (left) - price rises