The Price System and the Microeconomy
Demand
Supply
Elasticity
What is demand
Factors influencing demand
Demand refers to the quantity of a product that purchases are willing to buy at various prices per period of time.
Demand curve
Other Terms and definitions
Demand
Goods
Supply
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
Inferior goods: one whose demand decreases as income increases
Substitute: an alternative good
Normal goods: one whose demand increase as income increases
others
Price mechanism: the means of allocating resources in a market economy
Market: where buyers and sellers get together to trade
supply schedule: the data from which a supply curve is drawn
What is Supply
Factors influencing 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
Inelastic
PES
PED
Elastic
Complement: a good consumed with another
joint demand: when two goods are consumed together
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
Income
Price and availability of products
Fashion, taste and attributes
As price goes up, quantity supplied increases. As price goes down, quantity supplied decreases.
As supply increases, price decreases. As supply decreases, price increases.
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
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.
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.
Size and nature of industry
Change in the price of other products
Costs
Other factors
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.
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.
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.
If a competitor lower their price, it could mean that less will be supplied by other firms
Weather conditions, uncertain situation
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
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
where the relative change in demand or supply is greater than the change in price
where the relative change in demand or supply is less than the change in price
PES or PED >1 is elastic.
PES or PED <1 is inelastic.