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Market Demand:
Market demand describes the demand for a given product and…
Market Demand:
Market demand describes the demand for a given product and who wants to purchase it. This is determined by how willing consumers are to spend a certain price on a particular good or service. As market demand increases, so does price. When the demand decreases, price will go down as well.
Determinants of demand:
1) Consumers' tastes (preferences)
2) The numbers of buyers in the market
3) Consumers' incomes
4) The prices of related goods
5) Consumer expectations
When any of these determinants changes, the demand curve will shift to the left or to the right.
Increase in demand will shift the demand curve to the right.
Decrease in demand will shift the demand curve to the left.
1) Consumers' tastes (preferences)
New products may affect consumers tastes. A more desirable product leads to more demand of the product which shifts the demand curve to the right.
2) The numbers of buyers in the market
An increase in the numbers of buyers in the market increases demand.
3) Consumers' incomes
A rise in income causes an increase in demand.
Products whose demand varies directly with money income are called superior goods (normal goods).
Goods whose demand varies inversely with money income are called inferior goods.
4) The prices of related goods
A substitute good is one that can be used in place of another.
An increase in the price of one will increase the demand for the other.
A complementary good is one that is used together with another good.
If the price of a complement goes up, the demand for a related good will will increase.
5) Consumer expectations
Expectations of higher future prices may cause consumers to buy now. Expectations of lower future prices may cause consumers to purchase less now.
Change in demand
-Causes a shift of the demand curve to the right or to the left.
-Occurs when a consumers state of mind about purchasing a product has changed
Change in quantity demanded
-Movement from one point to another.
Law of demand
Negative/inverse relationship between price and quantity demanded.
As price falls, quantity demanded rises.
Income effect
Lower price increases the purchasing power of a buyer's money income, enabling the buyer to purchase more.
Substitution effect
Buyers substitute a product whose price has fallen for other products whose prices remain the same. Occurs because the product with the fallen price is now a better deal.
Market equilibrium price
(market clearing price) is the price where the buyers and sellers match.
Quantity demanded=Quantity supplied
No shortage, no surplus
Rationing function of prices
Ability of the forces of supply and demand to establish a price at which selling and buying decisions are consistent.
Efficient allocation
Productive efficiency-production of any good in the least costly way.
Allocative efficiency-particular mix of goods and services most highly valued by society.
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Price ceiling
-Maximum legal price that a seller may charge for a product/service.
-Price at/below the ceiling is legal.
-Price above is not legal.
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Price floors
-Minimum price fixed by the government.
-price at/above the price floor is legal.
-Price below is not legal.
Market Supply:
Supply is a schedule or a curve showing the various amounts of a product that producers are willing and able to make available for sale at each of series of possible prices during a specific period, other things equal.
Law of supply
Positive/direct relationship between price and quantity supplied.
As price rises, quantity supplied rises.
Upward slope of the curve-producers offer more of a good/service/resource for sale as price rises.
Determinants of supply:
1) Resource prices
2) Technology
3) Taxes and subsidies
4) Prices of other goods
5) Producers expectations
6) Number of sellers in the market
When any of the determinants changes, the supply curve will shift to the left or to the right.
Increase in supply will shift the supply curve to the right.
Decrease in supply will shift the supply curve to the left.
1) Resource prices
Higher resource prices raise production costs which squeezes profits. Reduction in profits reduces firms incentive to supply. Lower resource prices reduce production costs and increase profits. When resource prices falls, firms supply greater output.
2) Technology
Improvements in technology-more outputs with fewer resources. Because resources are costly, fewer of them reduces production costs and increases supply.
3) Taxes and subsidies
Increase in sales or property taxes, will production costs and reduce supply.
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4) Prices of other goods
Substitution in production. Prices increase in one product which would lead to supply of another product decreasing.
5) Producer expectations:
Changes in future price of a product will cause the producers current willingness to supply that product.
EG, a wheat farmer expecting price increases and thus with holding current supply.
6) Number of sellers in the market
All other things equal, the larger the number of suppliers, the greater the market supply.
As more firms enter the industry-supply curve shifts to the right.
As firms leave the industry-supply curve shifts to the left.
Change in supply
-Causes a shift in the supply curve to the right or to the left.
Change in quantity supplied
Movement from one point to another along a fixed supply curve.