Economics

Law of Supply

States that an increase in price results in an increase in quantity supplied and vice versa.

Equilibrium Price (PE)

The price that balances quantity supplied and quantity demanded.

Equilibrium Quantity (QE)

The quantity supplied and quantity demanded at the equilibrium price.

Surplus

The situation when quantity supplied exceeds quantity demanded, typically because the price is above equilibrium.

Shortage

The situation when quantity demanded exceeds quantity supplied, typically because the price is below equilibrium.

Price Mechanism

The process by which supply and demand determine the price and quantity of goods sold in a market.

Market Clearing Price

Another term for the equilibrium price, where all goods are sold, and all buyers are satisfied.

Invisible Hand of the Market

A term coined by Adam Smith describing the self-regulating nature of the marketplace.

Demand

The desire of consumers to purchase goods or services at given prices.

Supply

The amount of a good or service that producers are willing to sell at different prices.

Non-Price factors causing a shift in demand

Level of Disposable Income

Price of Related Goods

Tastes and Preferences

Expectations of Consumers

Demographic Factors

Level of Disposable Income

typically for a ‘normal’ good, demand increases as income increases, the exception for this is inferior goods, such as homebound products which demand increases when inco0me decreases because they are generally cheaper

Price of Related Goods

products you can substitute. If the price of pizza doubles, the demand for kebabs might increase. Some products are complements. If the price of pizza doubles, demand for garlic bread might fall

Tastes and Preferences

For example a trend gearing towards more environmentally friendly products, or health products.

Expectations of Consumers

the price of fuel is expected to rise on Tuesday, so demand for fuel will be higher on Monday. e.g. panic buying of toilet paper

Demographic Factors

The size and age of the population. For example, an older population might demand more cruises.

Supply

the amount of goods and services that producers are willing and able to sell at a particular price at a particular point in time

Law of Supply

As the price of a good or service increases, the quantity of goods or services supplied will also increase when producers new willing and able to sell them. This is due to profit motive

Non-Price Factors affecting Supply

Cost of production

Improvement in Technology

Prices of other Goods

Number of Sellers

Expectations of Producers

Taxes of Subsidies

Taxes of Subsides

Tax will increase costs to producers and decrease the quantity supplied as they are being charged more money. Subsides will make goods and services cheaper to produce so it will increase the quantity supplied.

Expectations of Producers

If a higher price of a good or service is expected in the future, firms will decrease their current supply in order to take advantage of higher prices in the future.

Number of Sellers

If new sellers enter the market, then market supply will increase and the supply curve will shift to the right.

Cost of Production

the amount of money used in the production of a good. It might change due to changers in the price officiators of production.

Improvements in Technology

Use of latest technology in the production of goods or services would improve the productivity and hence the cost of production per unit would decrease and producers would be able to supply more of that product with the same resources.

Price of other Goods

If the price of another good that a producer is able to supply goes up, producers will shift to produce more of that good rater than what they made previously.

Free Good

has zero opportunity cost

why might an economy operate outside the Production Possibility Frontier?

If it is trading with other economies

What are the determinants to PED

Time

Portion of Income

Availability of Substitutes

Definition of a Market

Luxury of Necessity

What are the determinants for PES

Nature of the market

Ability to store inventory

time