Supply and Demand

Demand

Quantity of a good or service that consumers are willing and able to buy at each given price level

Law of demand

The quantity demanded of a good falls when the price of the good rises

Utility

Satisfaction that consumers gain from consuming something

Marginal utility

Extra satisfaction that consumers receive from consuming one more unit of a good or service 

Market Demand

Sum of all individual demands for a good

Non-price determinants of a demand

Household income, preferences, price of substitution goods, demographics, future price expectations

Supply

Amount of goods or services that companies are willing and able to supply to the market for sale at each given price level

Markey supply

The sum of all individual firms’ supplies for a good

Revenue

Price x Quantity

Joint Supply 

The production of goods that are derived from a single product 

Competitive supply

Production of one product that competes with specific resources required to produce more of others

Non-price determinants of the supply curve

Changes in factors of production, technology improvements, indirect taxes, regulations, number of firms

Equilibrium 

When supply satisfies demand and vice versa 

Diagram surplus

The price of a good is higher than the equilibrium price, such that quantity supplied is greater than quantity demanded.

Diagram Shortage

The price of a good is lower than the equilibrium price, such that the quantity demanded is greater than the quantity supplied

Non price rationing systems

First-come first-served, allocation according to preferences, random allocation by ballot, bidding, coupons

Consumer surplus

The highest price consumers are willing to pay for a good or service - price actually paid

Producer surplus 

The price received by firms from selling their goods - the lowest price they are willing to accept in order to produce the good

Social surplus

Consumer surplus plus producer surplus

Price mechanism

System where the forces of demand and supply determine the prices of products

Signalling function

Prices communicate info to the decision makers

Incentive function 

Prices motivate decision makers to respond to the information. 

Marginal Private Benefits (MPB)

The benefits to one individual of consuming one more unit of a good, without considering the third party’s effect

MSB

The benefits of society of consuming one more unit of a good, including both private benefit and external benefit

Externalities

Effect on third parties when a product is produced or consumed 

Welfare loss

A loss of economic efficiency that can occur when the equilibrium for a good or service is not allocatively efficient

Demerit good

Goods or services considered to be harmful to people. Would be overprovided by the market and so over-consumed

Merit goods

Goods or services considered to be beneficial for people. Would be underprovided by the market and so underconsumed

Allocative efficiency

Resources are allocated most efficiently from society’s point of view (MB=MC)

MPC (Marginal private cost)

Extra cost to a firm/industry of producing an additional unit of output, excluding both the private cost and external costs.

MSC (Marginal social cost)

Extra cost to society of producing one more unit of output, including both the private cost and external costs

PED formula 

(QD2-QD1/QD1) x100 / (P2-P1/P1) x 100

What does PED = 0 mean

Perfectly price inelastic

PED is greater than one

Price elastic demand

Non-price determinants of PED 

Availability of substitutes, time, degree of necessity, proportion of income spent on good 

PES

How responsive is the quantity supplied to changes in price

PES Formula

(QS2-QS1/QS1) x 100/ (PS2-P21/PS1) x 100

Determinants of PES 

Time, availability of stocks and storage, mobility of factors of production, availability of spare capacity

YED (income elasticity of demand) formula

(QD2-QD1/QD1) x100/ (Y2-Y1/Y1) x 100

Necessities

YED between 0 and 1

Luxuries 

YED is greater than 1 

PED definition

How sensitive consumers are to changes in prices