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Summary Supply, Demand, Producer and Consumer Surplus
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Supply (definitions + short vs long run) Principle of Diminishing Marginal Utility + Law Changes in Price + income/substitute Shifts in DemandShows how many Units a firm would like to sell of diminishing Marginal Product effect Caused by change in factors other than
at any/each possible price Price (e.g. income)
Principle of Diminishing Returns to a Factor: As
more of the variable factor is added to the fixed Extension in Demand shift
factor, output increases at first, due to Demand Left
specialisation, but falls after due to there not
being enough fixed factor to go around
Short-run: Period of time where there is a fixed
factor of production (e.g. land) Contraction
Long-run: No fixed factor of production, all in demand
variable Demand
Consumer Surplus: Difference between what Short-run: firm can only +
output by adding more Shift
the consumer is willing to pay and what they variable factors to fixed
Right
actually pay. Worked out via area of triangle factor. Fixed factor overused
as limited. Output rises more
Income effect: as real Substitute effect: Demand
Producer Surplus: Difference between what the slowly (each worker
Incomes +, can afford to curve + as price -
contributes less than one
producer is willing to receive and what they Buy more, shown at Now cheaper than
P2, Q2. alternatives
actually receive. Worked out via area of triangle
Demand Demand Curves Changes in Supply and Exceptions
Effective Demand: Desire for a product
supported by the ability and willingness to pay
Factors affecting Demand: Price, Income,
Fashion, substitute
Principle of Diminishing Marginal Utility: As
we consume more of a product the EXTRA Supply stays same
satisfaction (marginal utility) starts to fall Whatever price is At same price rise,
because your need has already been partly S1 harder to make
met, therefore your willingness to pay also falls.
Demand Curve: Shows the quantity of a
good/service that the consumers wish to
purchase at a given price.
Market Demand Curve: Sum of individual Rationality
demand curves Traditional economics assumes Rationality
Marginal Utility: How many unit(s) consumers Economic Agents Well informed, logical,
are willing to get at every given price. maximisers Unlimited supply
Law of Demand: + price = - demand (vice versa) In reality, NO-ONE Rational No physical limits
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