Market Economy

Fixed supply or perfectly inelastic supply:

• Occurs where the supply of a product cannot be changed in the short term

• i.e. A stadium cannot be extended to fit more seating just because the demand for tickets exceeds seating capacity (supply)

Income Effect:

• The change in the consumption of goods based on income.

• Consumers will generally spend more if they experience an increase in income, and they may spend less if their income drops.

Substitution Effect:

• Occurs when a consumer replaces cheaper or moderately priced items with ones that are more expensive when a change in finances occurs. (NOTE: Opposite for when incomes decrease)

Demand

• Demand curve is downward sloping

• Movement along the demand curve occurs when there is a change in the selling price of the good.

• Negative shift on the demand curve = shift curve closer to zero - leftward

• Positive shift on the demand curve = shift curve closer to infinity - rightwards

Law of Demand:

• when the price increases, the quantity demanded decreases

• when price decreases, the quantity demanded increases

Exceptions to law of demand:

• Giffen Goods

  • Goods that are inferior in comparison to luxury goods.

  • When its price increases, the demand also increases.

  • e.g Irish Famine.

• Veblen Goods, Snob Goods, Goods of conspicuous consumption

  • Goods that become more valuable as their price increases

  • e.g Luxury Cars

• Expectations of price changes

• Necessary Goods

  • People will continue to buy necessities even if the price increases.

  • e.g medical supplies.

• Change in Income

Supply

• Supply curve is upward sloping

• Movement along the supply curve occurs when there is a change in the selling price of the good.

• Negative shift on the supply curve = shift curve closer to zero - leftward

• Positive shift on the supply curve = shift curve closer to infinity - rightwards

Law of Supply:

• when the price increases, the quantity demanded increases

• when price decreases, the quantity demanded decreases

Exceptions to Law of Supply:

• Closure of business

  • The seller may sell the good at low prices to clear the stock.

• Agricultural products

  • Land is a limited resource and therefor the agricultural produce cant increase beyond a certain level.

• Monopoly

• Competition

  • Where there is obvious competition in the market, sellers may sell more quantity of goods at a low price

• Perishable Goods

• Rare goods

  • Rare goods (such as artistic goods) that have limited supply

  • If demand/price rises, the supply of these goods cannot be increased

• Out of fashion goods

Equimarginal Principal

The equimarginal principal states that consumers will choose a combination of goods to maximise their total utility.

Equation: Marginal Utility of A / Price of A = Marginal Utility of B / Price of B

Marginal Utility of Expenditure: Consumers will consider both the marginal utility (MU) of goods and the price (summarises to MU / Price)

Law of Diminishing Marginal Utility: states that the amount of satisfaction provided by the consumption of every additional unit of a good decrease as we increase the consumption of that good. 

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Marginal Utility: is the change in the utility derived from the consumption of an additional unit of a good.