43 terms

Supply and Demand Econ


Terms in this set (...)

The quantity demanded
the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the the demand relationship.
represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship.
The law of demand
States in general, that the quantity demanded and the price of a good or service is inversely related, if other things remain constant. In basic terms this means the lower the price the higher the demand for that product or service and the higher the price the lower the demand for that product or service.
Demand curve
This is a graphical representation depicting the relationship between a commodity's different price levels and quantities which consumer are willing to buy. The curve can be derived from a demand schedule, which is essentially a table view of the price and quantity pairings that compromise the demand curve.
The curve will slope downward from left to right typically. There are some goods that exhibit an upward sloping demand, these goods and services are characterized as abnormal. The demand combination with the supply curve provides the market clearing or equilibrium price and quantity relationship. This is found at the intersection or point at which supply and demand curves cross each other.
Change in quantity demanded. This refers to a change along a curve. On the demand curve, a movement denotes a change in both price and quantity demanded from one point to another on the curve. The movement implies that the demand relationship remains consistent. A movement along the demand curve will occur when the price of the good changes and the quantity demanded changes in accordance to the original demand relationship. A movement occurs when a change in the quantity demanded is caused only by a change in price, and vice versa.
Change in demand. Happens when a good or services demand changes even though the price remains the same. A change in demand is a change in the ENTIRE demand relation. This means changing, moving, and shifting the entire demand curve. The entire set of prices and quantities is changing. This is a shift of the demand curve. A change in demand is caused by a change in the five demand determinants or shifters.
Demand shifters or determinants (non-price)= MERIT
M-market size (number of consumers). E-expectation (what do the consumers think will happen because of the outside services). R-related prices (substitutes or complements). I-income (normal or inferior goods). T-tastes and preferences (what is the fashion, fads, change of seasons).
Normal good
A good that consumers demand more of when their income increases. Ex: designer clothes, name brands
Inferior good
A good that consumers demand less of when their income increases. Ex: knock-offs
These goods are two goods that are bought and used together. Cookies and milk. PB & J.
These goods are goods that are used in place of one another. Pets- dogs or cats. Snowboard or skis. Laptop or tablet.
Consumer expectation
If consumers feel prices for a good will drop soon, they will wait to purchase the good at a later date. If prices are expected to rise, consumers will purchase the good now as opposed to waiting and risking playing more.
Gas. Non-perishable food. Season clothing. Seasonal decorations. Upcoming sales.
Tastes and preferences
Happens with a change in fashion and due to the pressure of advertising by manufacturers and sellers different products. Fads: an intense and widely shared enthusiasm for something especially one that is short-lived and without basis in the object's qualities
Demand curves shifts wording
When demand increases or decreases and shifts a demand curve it never shifts the curve up or down. If the demand increases the curve goes right and if it decreases the demand goes left.
Elasticity of demand
Price elasticity of demand is a measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. Price elasticity of demand is a term in economics often used when discussing price sensitivity. The formula for calculating price elasticity is: Price elasticity of demand= the percent of change in quantity demanded/percent of change in price.
If a small change in price is accompanied by a large change in quantity demanded, the product is said to be elastic (or responsive to price changes). A product is inelastic if a large change in price is accompanied by a small amount of change in quantity demanded. Price elasticity of demand measures the responsiveness of demand to changes in price for a particular good. If the price elasticity of demand is equal to 0, demand is perfectly inelastic (demand won't change when price changes). Values between 0 and 1 indicate that demand is inelastic (occurs when percent change in demand is less than the percent change in price). When price elasticity of demand equals one, demand is unit elastic (percent change in demand is equal to the percent change in price). If the value is greater than one, demand is perfectly elastic (demand is affected to a greater degree by changes in price).
For example, if the quantity demanded for a good increases 15% in response to a 10% decrease in price, the price elasticity of demand would be 15%/10%=1.5. The degree to which the quantity demanded for a good changes in response to a change in price can be influenced by a number of factors. Factors include the number of close substitutes (demand is more elastic if there are close substitutes). And whether the good is a necessity or luxury (neccessities tend to have inelastic demand while luxuries are more elastic). Businesses evaluate price elasticity of demand for various products to help predicts the impact of a pricing on product sales. Typically, businesses charge higher prices if demand for the products is price inelastic.
Elastic good
A change in price causes a bigger % change in demand, usually one or larger percent change. This basically means this good's quantity demanded is very sensitive to a change in price. Consumers will tend to buy more or less of this good with a price change. Perfectly elastic goods would be represented as a horizontal line. Ex: soda, bread, sports cars, apples, coffee.
Inelastic good
A change in price does not cause a change in demand. This basically means this goods quantity demanded is not sensitive to a change in price. Consumers will still buy more or less of this good is the price changes. Perfectly inelastic goods would be represented by a vertical line. Ex: milk, gas, water, diamonds, sports tickets.
Determines of elasticity
The elasticity of a product is determined by one or a combination of the certain factors. These factors include the availability of a substitute goods for that product, the proportion of the purchaser's budget consumed by the items, the degree of necessity, the duration of the price change, and the brand loyalty.
Availablity of substitute goods
The more possible substitutes there are of a given good or service, the greater the elasticity for that good or service. When several close substitutes are available, consumers can easily switch from one good to another even if there is only a small change in price. Conversely, of no substitutes are available, demand for a good is more likely to be inelastic.
Proportion of the purchaser's budget
Products that consume a large portion of the purchaser's budget tent to have great elasticity. The relative high cost of such goods will cause consumers to pay attention to the purchase and seek substitutes. In contrast demand will tend to be inelastic when a good represents only a negligible portion of the budget. Ex: shoe laces.
Degree of necessity
The greater the necessity for a good, the lower the elasticity. Consumers will attempt to buy necessary products (ex. medications) regardless of price. Luxury products, on the other hand, tend to have greater elasticity. However, some goods that initially have a low degree of necessity are habit forming and can become necessities to consumers (cigarettes)
The duration of the price change
For nondurable goods, elasticity tends to be greater over the long run than the short run. In the short-term it may be difficult for consumers to find substitutes in response to a price change, but over a longer time period consumers can adjust their behavior. This tendency does not hold for consumer durable goods. The demand for durables (cars) tends to be less elastic, as it becomes necessary for consumers to replace them with times.
Brand loyalty
An attachment to a certain brand (either out of tradition or because of propriety barriers) can override sensitivity to price changes, resulting in more inelastic demand.
The law of supply
States that there is a positive relationship between the quantity that suppliers are willing to sell and the price level. Basically it means the higher the price the more that will be supplied and the lower the price the less that will be supplied if everything else is held constant.
Supply schedules and curves
Supply is the amount of some product that producers are willing and able to sell at a given price, all other factors being held constant. A supply schedule is a table that shows the relationship between the price of a good and the quantity supplied. The supply curve is a graphical depiction of the supply schedule that illustrates that relationship between the price of a good and the quantity supplied. It is usually an upward sloping curve when depicted.
Supply schedule
Cane be two types, and individual supply schedule or a market supply schedule. The individual market supply schedule represents the different quantities of a product supplied by an individual sell at different prices. A market supply schedule refers to a supply schedule represents the different quantities of a product that all the suppliers in the market are willing to supply. Market supply schedules can be drawn by aggregating in the individual supply schedules of all individual suppliers in the market.
Shifts vs. movements
For economics the movements and shifts in relation to the supply curve represent very different market phenomena.
Movement of change in quantity supplied
Movement along the supply curve is driven solely by price. A supplier is driven to put more product on the market at a higher price, and a supplier is driven to put less product out if the price is lowered. This causes an increase or decrease in quantity supplied.
A movement along the supply curve
When the price of the good changes and other influences on seller's plans remain the same, the quantity supplied changes and there is a movement along the supply curve.
Shift or change in supply
The position of a supply curve will change following a change in one or more of the underlying determinants of supply. These determinants include technology, related prices, input prices, competition, and expectations. Each one will change the location of the supply curve in different ways or can combine. These determinants happen outside of price changes.
Supply curve shifters or determinants= TRICE
T- technology can increase or decrease the production costs for a producer. R-related prices the change in resources from producing one good to another good. I- input prices if the price of inputs goes up, supply will decrease (shift left) if the price of inputs goes down supply will increase shift right. C- competition how many firms are competing. An increase in number of firms competing gives us an increase in supply, while a decrease gives us a decrease in supply. E- expectations this has to deal with hoarding behavior. If everyone expects the price of gold to be higher in the future, they will sell less of it now to take advantage of higher future prices. This causes a decrease in supply. However, if people expect the price of houses to drop in the future, then everyone will want to sell today, which will result in an increase in supply.
The cost of production
The supply of items is affected not only by outside reasons but by the cost of producing or giving that service. The total costs of production comes from the fixed costs and variable costs. Producers also need to look at the marginal costs when it comes to production to decided if adding to the variable costs is worthwhile to do, or costs more than it is worth.
Fixed costs
These are costs that do not change depending on the quantity supplied. Ex: rent and taxes.
Variable costs
These are costs that the move up and down depending on how much quantity is created and supplied. Ex: raw materials and labor.
Total costs
The sum of the fixed costs and variable costs
Marginal costs of labor
The marginal product of labor is the change in output from hiring or adding one additional unit to production.
Marginal revenue
The additional income from selling one more unit of a good, sometimes equal to price
Marginal costs
The cost of producing one more unit of a good. Marginal cost is equal to the change in total cost divided by the change in total quantity.
The elasticity of supply
It is a measure of the way quantity supplied reacts to a change in price. The key factor to this is the amount of time that is available, in the short run most firms cannot easily change its output level, so the supply will be inelastic. In the long run though firms become much more flexible, and will have an elastic supply.