Flashcards in Microeconomics Deck (10)
A place where buyers and sellers meet to engage in mutual trade where prices are set by the interaction of demand and supply.
The willingness and ability of consumers to purchase a good or service at a given price in a given time period.
Law of demand
A negative casual relationship showing the state that as the price of a product falls, the quantity demanded of the product will usually increase, ceteris paribus.
Why is there an increase in demand?
1. Income effect: falling prices of a product allows consumers to increase their "real income" which reflects the amount that their incomes will buy.
2. Substitution effect: falling prices of a product will be relatively more attractive as they substitute it for products previously purchased.
What are non-price determinants of demand?
- normal goods: essential goods; as income rises, the demand for these products will also rise.
- inferior goods: not as good as normal goods; as income rises, the demand for these products will decrease as consumers buys higher priced substitutes instead.
2. The price of other products
- substitutes: change in A will cause a change in B as the price of A falling will lead to a higher demand of it, therefore resulting a fall of demand for B.
- complements: products purchased together. A change in C will cause a change in D as the price of C falling will lead to a higher demand of it as well as an increasing demand for D.
- unrelated goods: change in price of one product will have no effect upon the demand for the other.
Market favors alter the demand of a product
4. Other factors
- size of population: growth = increasing demand
- change in age structure of population: alter the change in demand for certain products
- change in income distribution: if the gap shortens, there may be an increase for necessity goods
- seasonal changes: change of pattern of demand
Distinction between movement along and a shift of the demand curve.
A change of the price of the good itself leads to a movement along the existing demand curve.
A change in any of the other determinants of demand will always lead to a shift of the demand curve to either the left or the right.
The willingness and ability of producers to produce a good or service at a given price in a given time period.
Law of supply
A positive casual relationship showing the state that as the price of a product rises, the quantity supplied of the product will usually increase, ceteris paribus.
Change in the quantity supplied.
A change in the price of the product itself will lead to a change in the quantity supplied (ie. a movement along the existing supply curve)
This occurs because at higher prices there will be more potential profits to be made so the producer will increase output.