Basics of demand and supply

What is utility

Satisfaction gained from consuming

What is marginal utility

Change in satisfaction when 1 extra unit of good is consumed

State the law of marginal utility

As more units of products are consumed, marginal utility decreases

State the law of demand

As price increases, quantity demanded decreases

Explain why the demand curve is downward sloping

Because the law of diminishing marginal utility

As marginal utility decreases, the price people are willing to pay for additional units decreases. 

What shifts demand (6)

1. Income: Shifts normal goods demand to the right, shifts inferior good supply to the left. (units of inferior goods are replaced with normal goods)

2. Preference and taste: Popularity of product

3. Price of substitute good: Eg. Price for coke falls → Qd for coke rises → units of pepsi are replaced with coke, demand for pepsi shifts left

4. Price of complementary good: Eg. Price for cars falls → Qd for cars rises → More cars = more need for petrol → demand for petrol shifts right

5. Future price expectation: Price expected to rise in future, demand increases as consumers will buy no not later

6. Changes in population: More population = more consumers, demand shifts right

State the law of supply

As price increases, quantity supply increases

Long run

Period of time where all FOPs are free to increase and decrease

Short run

Period of time when 1 or more FOPs are fixed (usually land or capital)

Momentary period

In this instance, where all of the FOPs are fixed (eg. The amount of fish up for sale today)

What is total output

Total number of goods produced over period of time

What is marginal output?

Extra output from 1 additional unit of FOP

What is average output?

Amount of output produced per unit of variable FOP (labour)

Formula for marginal output

MP = ∆TP / (∆ unit of FOP)

Unit for average output

AP = TP / (unit of FOP)

What does it mean if MP is greater than AP

AP is increasing

Where is maximum average output?

When AP = MP

What does it mean when AP is greater than MP

AP is decreasing

Draw the TP, AP and MP graph

What is Marginal diminishing returns

As more units of FOP are inputted into fixed land / capital, Marginal output increases at first, then decreases.

What is increase in marginal cost

As output increases, price per unit of output increases (efficiency decrease)

What explains the shape of supply curve

Supply curve is derived from the positive section of the marginal cost curve

What shifts the supply curve (8)

1. Cost of FOP: Increase in costs, shift supply left

2. Tech advancements: Lowers need for FOP → lowers costs, supply increase

3. Competitive supply: Eg. Price of butter increase → butter is more profitable → more whole milk is used to produce butter → No resources left to produce cream → supply for cream decrease

4. Joint supply: Price of butter increases → butter is more profitable → more whole milk is used to produce butter →  skimmed milk is produced in the process → supply for skimmed milk increase. 

5. Firm price expectations: Expected price increase = supply increase

6. Taxes: Increases COP → decreases supply

7. Number of competing firms: More competition → supply increase

8. Shocks: eg natural disasters

What happens if Qd > Qs in free market

Consumers compete for product and bids price up. As price increase, Qd decrease, Qs increase. Equilibrium met and market clears

What happens if Qs > Qd in free market

Producers will lower price to sell at surplus (profit maximise). As price decrease, Qd increase, Qs decrease. Equilibrium met and market clears

Where is allocative efficiency?

P = MC

OR

Ar = MC

(AR) is also MB

Where is production efficiency

MC = AC

Equation for consumer surplus

½ (P intercept of demand curve - P of consumers) * quantity

Consumer surplus definition

The amount of money that the consumers “earn” from paying a price that is lower than the highest price they are willing to pay

Equation for producer surplus

½ (P of producers - P intercept of supply curve) * quantity

Producer surplus definition

Amount of extra money producers “earned” from selling at a price higher than the lowest price they are willing to sell at.

What is maximum social surplus

Where the sum of consumer and producer surplus is maximised, also at allocative efficiency