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The Price System and the Microeconomy - Coggle Diagram
The Price System and the Microeconomy
Demand
What is demand
Demand refers to the quantity of a product that purchases are willing to buy at various prices per period of time.
Demand curve
As price goes up, quantity demanded goes down. As price goes down, quantity demanded rises.
As demand increases, prices go up. As demand decrease, prices go down.
The
notional demand
for a product must be backed by consumers' purchasing power for it to become an
effective demand
Factors influencing demand
Income
the ability for a consumer to pay for a product/services. As their income increases, demand is most likely to increase too. however for products like
inferior goods
(bad-quality food, cheap restos). For those, people whose income increases tend to pick more superior goods.
Price and availability of products
With the presence of substitutes and complements, demand can change too. For example, if the price of coca cola increases, then demand for pepsi will increase as both products are substitutes.
Fashion, taste and attributes
Consumer demand tend to follow trends and fashion. If it is during the summer season, then shirt who follow the newest trend will experience the highest demand
Supply
What is Supply
The quantities of a product that suppliers are willing and able to sell at various prices per period of time, other things being equal.
Supply curve
As price goes up, quantity supplied increases. As price goes down, quantity supplied decreases.
As supply increases, price decreases. As supply decreases, price increases.
Factors influencing supply
Size and nature of industry
A booming and growing industry will persuade producers to supply more and more things causing quantity supplied to increase. While on the other hand, the opposite happens for a slowing industry.
Change in the price of other products
If a competitor lower their price, it could mean that less will be supplied by other firms
Costs
Examples of costs are like wage rates, raw materials, transport cost. If those increases then producing will be more expensive, causing quantity supplied to decrease.
Other factors
Weather conditions, uncertain situation
Government policy
A tax on a new product can cause production cost to increase, and so quantity supplied to decrease. A subsidy on the other hand helps lower production costs that'll increase quantity supplied.
Elasticity
Inelastic
where the relative change in demand or supply is less than the change in price
PES or PED <1 is inelastic.
PES
A numerical measurement of the responsiveness of the quantity supplied to change in the price of a product.
% change in quantity supplied / % change in price
PED
A numerical measure of the responsiveness of the quantity demanded to change in the price of a product.
% change in quantity demanded / % change in price
Elastic
where the relative change in demand or supply is greater than the change in price
PES or PED >1 is elastic.
Other Terms and definitions
Demand
effective demand
: demand that is supported with the ability to ay
demand schedule
: the data from which a demand curve is drawn
market demand
: the total amount demanded by customers
notional demand
: the demand is speculative and not always backed up by the ability to pay
joint demand
: when two goods are consumed together
Goods
Inferior goods
: one whose demand decreases as income increases
Substitute
: an alternative good
Normal goods
: one whose demand increase as income increases
Complement
: a good consumed with another
Supply
supply schedule
: the data from which a supply curve is drawn
others
Price mechanism
: the means of allocating resources in a market economy
Market
: where buyers and sellers get together to trade