Economics HL: Demand & Supply

Demand & Supply

Market

A market is a situation where potential buyers are in contact with potential sellers. it enables the needs & wants of both parties to be fulfilled while establishing a price and allowing an exchange to take place.

Competitive Market

A competitive market is one with many buyers and many sellers, where prices are set by the forces of supply and demand.

Demand

The quantity consumers are able and willing to buy at a given price in a given time period

Law of demand

Ceteris paribus, there is an inverse relationship between the price of a good and its quantity demanded.

Substitution effect

When the price of a good increases, consumers switch to cheaper alternatives instead.

Income effect

When price changes affect consumer purchasing power

Utility

The satisfaction or benefit gained from the consumption of a good or service.

Law of diminishing marginal utility

As more units of a good or service are consumed, the additional satisfaction from each new unit eventually decreases.

Supply

The quantity that suppliers are willing and able to sell at different prices over a period of time.

Law of supply

Ceteris paribus, there is a positive relationship between price and quantity supplied. This means that as price increases, quantity supplied increases.

Competitive supply

Using the same resources to make different products, so making more of one means making less of another.

Joint Supply

Making one product also creates another product at the same time, increasing supply for the main product.

Short run

A period of time where at least one FOP is fixed. Most production takes place during this time.

Long Run

A period of time where all FOP’s are variable. All planning takes place during this time.

Law of diminishing marginal returns

The increased output per additional unit of variable input will ultimately fall.

Marginal output

The additional to total output caused by adding one more unit of a variable

Marginal cost

The additional cost of producing one more unit of output.

Market equilibrium

When forces of demand and supply come together, we get the creation of market equilibrium where price and quantity are equal.

Demand curve shifts to the right in equilibrium

Excess demand, more will be demanded and supplied at a higher price

Demand curve shifts to the left in equilibrium

Excess supply, less will be demanded and supplied at a lower price.

Supply shift to the right in equilibrium

Excess supply, more will be demanded and supplied at a lower price.

Supply shift to the left in equilibrium

Excess demand, less will be demanded and supplied at a higher price.

Marginal benefit

Extra benefit you get from each additional unit of something you buy. Consumers will be willing to buy an extra unit only if price falls.

Marginal cost (equilibrium)

Extra cost of producing one more unit of output. Producers are willing to produce more only if the price increases.

Price Mechanism

Prices determined by the forces of demand and supply in competitive markets are known as price mechanisms.

Signalling Function.

Any change in price is a signal to suppliers to either increase or decrease their output.

Incentive function

Any change in the market price provides an incentive for consumers & producers to adjust their behaviours.

Rationing function

Market prices ration scarce goods by allocating them to those consumers who are willing and able to pay.

Allocative effiency

Producing the quantity of goods most wanted by society. It’s achieved when the economy allocates its resources so that the society gets the most benefit from consumption.

Consumer Surplus

Highest price consumers are willing to pay for a good minus price actually paid (equilibrium price)

Producer surplus

Price received by firms for selling their goods (equilibrium price) minus the lowest price that they are willing to produce the good.

Social surplus

Sum of producer surplus & consumer surplus

Welfare

refers to the amount of consumer & producer surplus. Its maximum when social surplus is maximum, MB= MC