2.1-2.3: Demand, Supply and Competitive Market Equilibrium

What is supply?

Quantity of a good/service a firm is willing and able to produce and supply at different price points during a particular period of time, cp.

What is the law of supply?

Positive causal relationship between price and quantity supplied, cp.

According to the law of supply, if price increases...

Supply increases.

According to the law of supply, if price decreases...

Supply decreases.

What is market supply?

Sum of all individual supplies from all firms.

What does a vertical supply curve indicate?

Fixed supply; cannot change with price.

What goods have a vertical supply curve?

Goods with a fixed supply.

What are examples of goods with a vertical supply curve? (2)

- Tickets for theatres/stadiums with limited seats.

- Original antiques and paintings.

What are the non-price determinants of supply? (7)

- Change in the costs of FOPs/inputs.

- Price of related goods (competitive and joint).

- Change in producer expectations.

- Changes in production technology.

- Number of firms in the market.

- Change in taxes.

- Change in subsidies.

If the cost of a factor of production increases,

Supply decreases.

Why does supply decrease if the cost of an FOP increases?

Production costs increase, profits decrease, firms produce and supply less.

If the cost of a factor of production decreases,

Supply decreases.

Why does supply increase if the cost of an FOP decreases?

Production costs decreases, profit increases, firms produce and supply more.

How does improved technology cause increased supply?

Lowers costs and increase profits; more supplied.

If production technology improves,

Supply increases.

What is competitive supply?

When two goods that use the same resources compete to be produced i.e. more of one means less of other.

If the price of good A increases, which is in competitive supply with good B...

Supply of good A increases, supply of good B decreases.

If the price of good A decreases, which is in competitive supply with good B...

Supply of good B increases, supply of good A decreases.

What are some examples of competitive supply? (2)

- Production of crops which require same resources.

- Production of vehicles which use the same resources.

What is joint supply?

When the production of one goods leads to the production of another i.e. more of one means more of the other.

If the price of good A increases, which is in joint supply with good B...

Supply of both goods increase.

If the price of good A decreases, which is in joint supply with good B...

Supply of both goods decrease.

What are some examples of joint supply?

- Production of beef and leather.

- Production of wool and lamb.

How do taxes influence supply?

Taxes are like costs of production; increased taxes reduce supply, decreased taxes increased supply.

If taxes increase...

Supply decreases.

Why does supply decrease if taxes increase?

Increased costs, less profit, less produced.

If taxes decrease...

Supply increases.

Why does supply increase if taxes decrease?

Decreased costs, more profit, more produced.

What are subsidies?

Payment made from a government to a firm.

What is the purpose of a subsidy?

Increase output produced (supply) by lowering production costs.

If a subsidy is provided/increased,

Supply increases.

Why does supply increase when a subsidy is provided/increased?

Production costs decrease, more profit, produce more.

If a subsidy is removed/reduced,

Supply decreases.

Why does supply decrease when a subsidy is removed/decreased?

Production costs increase, less profit, produce less.

If producers expect the price of a good to rise in the future,

Supply decreases.

Why does supply decrease if producers expect the price to increase?

Hold supply and sell when prices are higher; more profit.

If producers expect the price of a good to fall in the future,

Supply increases.

Why does supply increase if producers expect the price to decrease?

Increase supply to take advantage of current high prices.

If the number of firms producing a good increases,

Supply increases.

If the number of firms producing a good decreases,

Supply decreases.

A change in price causes...

A change in quantity supplied.

What can change the quantity supplied?

A change in price.

What does a change in price do to the supply curve?

Causes a movement along the supply curve.

A change in a non-price determinant causes...

A change in supply.

What can cause a change in supply?

A change in a non-price determinant.

How does a change in a non-price determinant influence the supply curve?

Shifts the entire supply curve.

What does an increase in supply do to the supply curve?

Rightwards shift.

What does a decrease in supply do to the supply curve?

Leftwards shift.

What causes a leftwards shift of the supply curve?

A decrease in supply.

What causes a rightwards shift of the supply curve?

An increase in supply.

What is a market?

Arrangement where buyers and sellers of goods, services or resources carry out an exchange.

What is demand?

Quantity of a good/service that consumers are willing and able to pay at different price points during a particular time period, cp.

What is the law of demand?

Inverse relationship between price and quantity demanded, cp.

According to the law of demand, if price increases...

Demand decreases.

According to the law of demand, if price decreases...

Demand increases.

What is market demand?

Sum of all individual demands for a good/service.

What assumptions underly the law of demand? (3)

- Law of diminishing marginal utility.

- Income effect.

- Substitution effect.

What is utility?

Satisfaction consumer gets from consuming a good/service.

What is the law of diminishing marginal utility?

As more units of a good/service are consumed, the marginal utility decreases with each unit consumed.

How does the law of diminishing marginal utility underly the law of demand?

Consumers will only buy additional units if the price falls.

What is the income effect?

- A fall in price of a good increases purchasing power; makes it seem like consumer income has increased.

- An increase in price decreasing purchasing power; like income decreases.

What is the substitution effect?

When the price of a good falls, consumers substitute to the cheaper good.

How does the income and substitution effect underly the law of demand?

Explains why consumers increase demand for goods that are cheaper.

What are non-price determinants?

Any variable other than price that influences demand.

What are the non-price determinants of demand? (5)

- Change in income.

- Future price expectations.

- Change in tastes and preferences.

- Price of related goods (substitute and complementary).

- Change in the number of consumers.

How does a change in income influence the demand of normal goods?

- If income increases, demand increases.

- If income decreases, demand decreases.

If income increases, the demand of a normal good...

Increases.

If income decreases, the demand of a normal good...

Decreases.

If income increases, the demand of an inferior good...

Decreases.

If income decreases, the demand of an inferior good...

Increases.

How does a change in income influence the demand of inferior goods?

- If income increases, demand decreases.

- If income decreases, demand increases.

What are inferior goods?

Goods that are substitutes to more expensive options purchased by those with lower incomes.

What are examples of inferior goods? (2)

- Second-hand car in contrast to new cars.

- Generic brand clothing in contrast to designer branded.

How do future price expectations influence demand?

- If price/taxes likely to increase, demand increases.

- If price/taxes likely to decrease, demand decreases.

If the prices/taxes of a good are likely to increase, demand...

Increases; consumers buy now to avoid higher prices in the future..

If the prices/taxes of a good are likely to decrease, demand...

Decreases, consumers wait for the lower prices.

If preferences and tastes change in favour of a good, demand...

Increases; more people buy it.

If preferences and tastes change against a good, demand...

Decreases; less people buy it.

What are substitute goods?

Goods that satisfy a similar need.

What are some examples of substitute goods? (3)

- Coke and Pepsi.

- Colgate and Oral B toothpaste.

- Dominoes and Pizza Hut.

What are complementary goods?

Goods that are bought and used together.

What are some examples of complementary goods? (2)

- Tennis balls and tennis racquets.

- Cars and petrol.

- Computers and keyboards.

If the price of a substitute to good X increases, then...

The demand of good X increases; cheaper than substitutes.

If the price of a substitute to good X decreases, then...

The demand of good X decreases; pricier than substitute.

If the price of a complement to good X increases, then...

The demand of good X decreases; consumers will not buy the two goods together.

If the price of a complement to good X decreases, then...

The demand of good X increases; consumers buy both goods.

If the number of buyers increases,

Demand increases.

If the number of buyers decrease,

Demand decreases.

What does a change in price do to the demand curve?

Causes a movement along the demand curve.

Can a change in the price of a good influence its demand?

No, changes quantity demanded.

What can change the quantity demanded of a good?

Increase in price.

Can a change in a non-price determinant influence demand?

Yes.

What can influence demand?

Change in a non-price determinant.

How does a change in a non-price determinant influence the demand curve?

Shifts the entire demand curve.

What does an increase in demand do to the demand curve?

Demand curve shifts rightwards.

What does a decrease in demand do to the demand curve?

Demand curve shifts leftwards.

What causes a leftwards shift of the demand curve?

Decrease in demand.

What causes a rightwards shift of the demand curve?

Increase in demand.

When is a competitive market in equilibrium?

When quantity demanded = quantity supplied.

When is a competitive market in disequilibrium?

When quantity demanded ≠ quantity supplied.