Fundamentals of Economics: Supply, Demand, and Market Dynamics

Economics notes Supply and Demand Notes Demand Curve – shows the quantity that consumers are willing and able to buy at various prices, ceteris paribus (everything else remaining the same) Effective Demand: “willing and able”: not the same as desire, wish or need The law of downward-sloping demand curve: states that a higher quantity will be demanded at lower price and vice-versa ** Demand curve graph Clarity in use of terms – fully label the axis in graph Substitution Effect- if the price of a good increases, the good becomes relatively more expensive and consumers will switch to purchasing relatively cheaper substitutes. (Ex. smart vs globe, coke vs Pepsi) Income Effect – if the price of a good increases, the consumer’s real income falls (i.e. less purchasing power), and he can afford to purchase less of the good. ** Nominal income vs Real income Utility – satisfaction (usefulness) Total Utility – total satisfaction gained from consuming a given amount of a good. Marginal Utility (MU) – the extra satisfaction gained from consuming an extra unit of a good. Law of Diminishing Marginal Utility – successive units of consumption will eventually lead to a fall in MU. Supply Curve – shows the quantity of a good supplied at various prices during a specific period of time, ceteris paribus. The Law of Supply – price and quantity are directly proportional i.e. a rise in the price of a good will lead to an increase in the quantity supplied. **Supply Curve Graph A change in quantity supplied – a movement along the supply curve as a result of a change in price. A change in Supply – a shift in the supply curve as a result of changes in factors other than the price. Buffer stock scheme – a scheme whereby the government buys and sells in the open market to stabilize the price for a product. Ex. OPSF (Oil price stabilization fund) Advantage: Stabilizes prices in volatile industries (e.g. primary agricultural products) Minimizes uncertainty & speculation Disadvantages: Storage & administration costs Perishable goods Funded from taxation (milking the taxpayer instead of the cow!) If price is set too high, may lead to surpluses (e.g. “wine lakes” and “butter mountains”) Stocks might not be sufficient (i.e. shortages) if there are many bad years Price Band: the government allows the price to fluctuate but keeps it within an acceptable range. Market Economies-people coming together, working in own best interest.-consumers are able to decide how much to purchase taking market price as given (demand)-producers are able to decide how much to sell, taking the market price as given. (Supply)-Contrast to controlled economies such as socialism, Marxism, communism- where the government makes the production and consumption decisions.-In general, a market economy will give the best social outcome (highest surplus)-no government intervention. Demand-Represents consumers-All demand for a product/service is called a market demand-different types of market such as corn, steel, textiles, oil, milk, government services-when looking at demand, you want to determine how much someone will buy at each possible price.-when looking at a market as a whole, you have what is called a Law of demand.-law of demand- as price increases, quantity demanded decreases( more expensive something is, the less we want to buy)-Demand is an inverse relationship between price and quantity.-for each unit of consumption, the demand curve also represent our marginal benefit. (More we have of a good, the lower the marginal benefit of the next unit) ex: pizzaDemand curve is a graphical representation of the law of demand.