Demand_and_supply_2022 (8)

Real-World Issue

How do consumers and producers make choices in trying to meet their economic objectives?

Understanding competitive markets: All transactions of a given good or service occur within a competitive market.
- Product Market: Focuses on consumer goods and services.
- Factor Market: Involves factors of production, e.g., the labor market.

Demand and its Determinants: Understand the principles governing demand.
Law of Demand: Analysis of the relationship between price and quantity demanded.
Assumptions Underlying the Law of Demand: Higher learning levels focus on underlying assumptions.
Supply and its Determinants: Examine factors affecting supply in the market.
Law of Supply: Exploration of how price influences supply.
Assumptions Underlying the Law of Supply: Advanced learning delves into foundational assumptions.

Notable Work: Economics of Industry (1879), which contributed to foundational economic theories regarding supply and demand.

Price vs. Quantity Demanded:
- Demonstrated through graphs showing quantities at varying price points, such as cappuccino demand.
- Law of Demand: As price rises, quantity demanded falls; as price falls, quantity demanded rises (ceteris paribus).

Key Determinants:
- Price: Significant influence on demand.
- Income: Higher income level generally increases demand.
- Population Size: More consumers lead to higher demand.
- Preferences: Changes in consumer preferences can shift demand.
- Expectations: Anticipations about future prices can affect current demand.
- Random Factors: Unexpected variables that can modify demand levels.

Cappuccino Demand: Analyzed through individual contributions (local residents, tourists) leading to total market demand.

Influential Work: The Theory of the Leisure Class (1899), introducing concepts relevant to consumer behavior regarding luxury goods.

Concept Overview: Consumers may prefer purchasing expensive luxury goods as a way to signify status rather than for their intrinsic utility.

Key Effects:
1. Income Effect: Price changes affecting consumers' purchasing power.
2. Substitution Effect: Change in relative attractiveness of goods affecting consumer choices.
3. Law of Diminishing Marginal Utility: Additional units consumed provide less satisfaction than the initial units.

Price decreases lead to an increase in real income, motivating more purchases of the product.

A decrease in price increases attractiveness compared to other unchanged goods, leading to higher purchasing rates of the discounted product.

As consumption of a product increases, the additional satisfaction derived from each subsequent unit decreases, influencing willingness to pay.

Price vs. Quantity Supplied: Relationship between price and quantity supplied of goods (like bottles of wine).
Law of Supply: Quantity supplied increases as price rises and decreases as price falls (ceteris paribus).

Key Determinants:
- International Trade: External market influences on supply.
- Costs of Production: Input costs directly affect supply capacity.
- Number of Firms: More firms generally increase supply.
- Technology Factors: Technological advancements can improve supply efficiency.
- Expectations: Producers' anticipations can influence current supply levels.

Higher prices result in increased quantities supplied; lower prices result in decreased quantities supplied (ceteris paribus).

Different price levels (S2, S3) demonstrate how supply shifts can occur due to various economic factors.

Evaluating supply responses from individual vineyards to total wine supply in the market.

Law of Diminishing Marginal Returns: Variable factors yield decreased additional output after a certain point.
Increasing Marginal Costs: The cost to produce additional units typically rises with output quantity.