economics - demand and supply

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  • Created by: studyyin
  • Created on: 01-01-18 14:44

How markets work

  • Market for a good or service consists of producers willing and able to supply it and consumers willing and able to demand it.

Demand

  • Demand is the want and willingness of a consumer to buy a product.
  • An effective demand can only occur if the consumer has enough money to buy the product.
  • The relationship between demand and price is inversed and negative.
  • So demand curve slopes downwards
  • As price increases, quantity demanded decreases and vice versa
  • A contraction is when demand falls as price increases.
  • An extension is when demand rises as price decreases.
  • Extension and contraction are MOVEMENT ALONG THE CURVE and only affected by price
  • Determinants of demand:
  • Disposable income
  • Price of substitutes (substitute is a good that can satisfy the same wants / have same function)
  • Price of complements (complements are goods in joint demand)
  • Taste and favour
  • Population
  • Advertising
  • The determinants of demand cause a SHIFT between curves.


Supply

  • Supply is the ability and willingness of the producers to make a good available.
  • The relationship between supply and price is positive
  • As price increases, quantity supplied increases: extension
  • As price decreases, quantity supplied decreases: contraction
  • Supply curve slopes upwards.
  • Determinants of supply:
  • Cost of production
  • Technical improvements/failures
  • Economic turnover/downturn
  • Supply of resources
  • Profitabillity
  • Prices of complement/substitutes
  • Business optimism
  • Maximise sales/profits
  • Subsidies/taxation

Market equilibrium

  • A market is in equilibrium when the quantity demanded matches the quantity supplied. 
  • Market demand = market supply
  • Market price: the quantity

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