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Demand and supply

Market

A place, physical or virtual, where buyers and sellers of goods and services meet to make an exchange.

Competitive market

The market for a good with large numbers of buyers and sellers, where the single seller has very little or no market power.

Demand

The quantity of a good or service that consumers are willing and able to buy at a given price in a given time period.

The Law of Demand

As the price of a good increases, the quantity demanded of the good decreases, ceteris paribus.

The substitute effect

If the price of a good falls, the consumer substitutes (buys more) of the now less expensive good.

The income effect

Consider again a fall in price, this means that the consumer’s real income (or purchasing power) has increased. Therefore as price falls and real income increases, quantity demanded of the good increases.

Supply

The quantity of a good or service that producers are willing and able to produce at a given price in a given time period.

The Law of Supply

As the price of a good increases, the quantity supplied of the good increases, ceteris paribus.

Vertical supply curve

A fixed quantity of the good supplied. Because there is no time and possibility to produce more of it.

Joint supply

Goods which are produced together, or where the production of one good involves the production of another product, e.g. meat and leather (a by-product)

Competitive supply

Refers to goods that can be produced in a similar way, with similar inputs and processes.

Price factor: movements along the demand / supply curve Non price factor: shift of demand **/**supply curve

Non-price determinants of demand

  1. Income (normal goods/inferior goods)
  2. Prices of related goods (substitutes/complements)
  3. Preferences (tastes)
  4. Demographic changes (number of consumers)

Non-price determinants of supply

  1. Costs of factors of production (land, labor, capital and entrepreneurship)
  2. Technology
  3. Prices of related goods (joint/competitive S)
  4. Expectations
  5. Indirect taxes and subsidies
  6. Number of firms in the market

Invisible hand

In a free market, price is determined by demand and supply.

Laissez faire

Thus, there is no need for a government to intervene in the economy.

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