1.1 Competitive Markets: Demand and Supply

Scarcity is not a requirement for a market to exist.

The law of demand states that the [blank_start]quantity demanded[blank_end] for a good or service falls as its [blank_start]price[blank_end] rises. The demand curve shows an [blank_start]inverse[blank_end] relationship between these.

Three Causes of Negative Relationship between Price and Quantity Demanded

[blank_start]Income[blank_end] Effect: As price falls, the real income of consumers rises.

[blank_start]Substitution[blank_end] Effect: As the price of a good or service falls, more customers are able to pay, so they are more likely to buy the product.

[blank_start]Diminishing Marginal Returns[blank_end]: As people consume more of a particular good or service, the utility gained from the marginal unit declines, so customers will only purchase more at a lower price.

Non-Price Determinants of Demand (HIS AGE) H: [blank_start]Habits[blank_end] I: [blank_start]Income[blank_end] S: [blank_start]Substitutes[blank_end] A: [blank_start]Advertising[blank_end] G: [blank_start]Government Policies[blank_end] E: [blank_start]Economy[blank_end]

The demand for [blank_start]normal[blank_end] goods rises with an increase in income. The demand for [blank_start]inferior[blank_end] goods rises with a decrease in income.

A price rise will cause a [blank_start]contraction[blank_end] in the quantity demanded for the product. A price fall will cause an [blank_start]expansion[blank_end] in the quantity demanded.

Qd = a - bP where (a) is demand, irrespective of price and (-b) is the slope of the demand curve

The Law of Supply states there is a positive relationship between the [blank_start]Quantity Supplied[blank_end] of the Product and its [blank_start]price[blank_end].

Supply is the willingness and ability of firms to provide a good or service at a given price level, per time period.

A [blank_start]shift[blank_end] in supply is caused by changes in non-price factors that affect supply. A [blank_start]movement[blank_end] in supply is caused only by changes in price.

Non-Price Determinants of Supply (SWATCH) S: [blank_start]Subsidies[blank_end] W: [blank_start]Weather[blank_end] A: [blank_start]Advancements in Technology[blank_end] T: [blank_start]Time[blank_end] C: [blank_start]Competitive Supply[blank_end] H: [blank_start]Hurdles[blank_end]

Qs = c + dP where (c) is the slope and (+d) is the supply, irrespective of price.

The [blank_start]signaling function[blank_end] of price tells producers whether to enter or leave the market.

Which is the consumer and producer surplus?

Label the production possibility curve (PPC).

With allocative efficiency, no one can be made better off without making someone worse off.