Supply and Demand

Explain why scarcity necessitates choices that answer the "What to produce?" question.

- Scarcity of resources - Renewability of resources - Availability of FOPs - Surplus Supply - Excess Demand

Outline the meaning of the term market.

A market is where buyers and sellers come together to carry out an economic transaction. Goods or services are exchanged for exchanged for money.

Distinguish between movements along the demand curve and shifts of the demand curve.

A movement along the demand curve indicates that there has been a change in price, a shift indicates that a non-price determinant of demand has created a new demand curve.

Distinguish between movements along the supply curve and shifts of the supply curve.

A movement along the supply curve indicates that there has been a change in price. A shift in the supply curve indicates that a non-price determinant of supply has created a new supply curve.

Describe the relationship between an individual producer's supply and market supply.

An individual producer's supply makes up the larger market supply

Describe the relationship between an individual consumer's demand and market demand.

An individual's demand is part of a market's greater demand, which is the total demand for goods and services by a community

Explain the negative causal relationship between price and quantity demanded.

As price increases, the quantity demanded decreases.

Explain that the best allocation of resources from society's point of view is at competitive market equilibrium, where social (community) surplus (consumer surplus and producer surplus) is maximized (marginal benefit = marginal cost).

At market equilibrium, the consumer surplus and the producer surplus is the same thus customers and sellers make most profit. This is where the market is socially efficient. Generally considered to be in effect if society is getting the goods and services it wants most. Achieved if society produces enough of a good so that marginal benefit = marginal cost. Marginal benefit (satisfaction) tends to drop as more is consumed, similar to demand curve. Marginal cost increases as more and more units are produced due to cost of production, similar to supply curve. Attempts to maximize social surplus (consumer surplus + producer surplus), often reached by competitive market equilibrium.

What are the non-price determinants of supply?

Changes in Costs of FOPs Technology Price of related goods Expectations Indirect Taxes Subsidies Number of firms in the market

Explain the non-price determinants of demand (Income, Taste, Substitutes, Demographic)

Changes in income (in the case of normal and inferior goods) - If there were increased income, demand would increase for normal goods since buyers are expecting their incomes to increase which means that they will start consuming more normal goods. If a product were considered to be inferior, there'd be decrease in demand for that product since people would spend less of a proportion of their income on these kinds of goods. Taste - Would increase or decrease depending on how the consumer starts viewing the product, for example if company x makes a successful advertisement many people's taste can change and the demand would increase. Price of related goods (in the case of subs and complements) - If prices of related goods decreases, the demand for the substitute would decrease since more people would buy the related good due to it being cheaper. For complement goods, if prices of related goods decrease, the demand for the related goods will increase thus resulting in increased demand for the complements. If prices of related goods increase, the demand for the substitute would increase since more people would buy the substitute good because it's cheaper. For complement goods, if prices of related goods increase, the demand for the related goods will Demographic changes

Explain, using diagrams, how demand and supply interact to produce market equilibrium.

Market equilibrium is where supply and demand meets (also known as the equilibrium point). This is shown at point QEQ,PEQ (where market equilibrium is achieved). At this point all goods that are being produced are being sold, this is the most ideal situation for a company, however, this is very unlikely to happen in real life.

Explain, using diagrams, that price has a signalling function and an incentive function, which result in a reallocation of resources when prices change as a result of a change in demand or supply conditions.

Price has a signaling function and an incentive function, because when price goes up, sellers are more willing to make more products while consumers are less willing to buy the product because of its expensiveness. If price goes down, sellers are less willing to make products while consumers are more willing to buy products. Rise in price gives an incentive for the sellers to make more of the product. When demand for good increases, a temporary shortage occurs. This signals firms to raise the price of the good, acting as an incentive to produce, but also for consumers to reduce the quantity they demand, relieving the shortage. Eventually a new EQ will be reached over time as consumers, firms and producers adjust to each other's consumption habits

Explain that a demand curve represents the relationship between the price and the quantity demanded of a product, ceteris paribus.

The demand curve represents the inverse relationship between price and quantity demanded due to its negative slope. As price increases the quantity demanded decreases, and vice versa.

Explain that a supply curve represents the relationship between the price and the quantity supplied of a product, ceteris paribus.

The supply curve has a positive slope, thus giving it a direct relationship to price. As price increases, so does supply, and likewise if price decreases so does supply

Explain the positive causal relationship between price and quantity supplied.

There is a direct relationship between price and quantity supplied. As suppliers see that the price for a good has increased, they will start producing more since it is allows them to make more profit, and likewise if price decreases, producers will produce less