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Summary Varsity College BCOM Year 1 Economics Ch 4
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Varsity College BCOM Year 1 Economics Ch 4
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Economics Ch 4Ch 4 – Demand, supply, and prices
In this chapter, we will be putting the goods market under a microscope and examine the
behaviour of the households and firms. The households are the driving force behind the
demand for consumer goods and services and the firms are the driving force behind the
supply of goods and services.
4.1 Demand and supply: an introductory overview
Households own the factors of production whilst firms buy these factors of production
and produce goods and services.
In the goods market, firms are the suppliers of goods and services, and households are
the consumers who demand the goods and services concerned. In a market economy,
the prices and quantities traded in the goods market determined by the interaction of
supply and demand.
Supply and demand interact to determine the equilibrium price and equilibrium quantity
in the market.
Difference between Ceteris paribus and equilibrium:
Ceteris paribus
Ceteris paribus means other things being equal.
Ceteris paribus assumption is used when allowing one variable to change at a
time while holding other variables constant.
Equilibrium
Equilibrium is assumed to be a point where the quantity demanded equals
to the quantity supplied. This can be explained by the notion that, the plans of
households coincide with the plans of firms.
The price at which equilibrium occurs is called the equilibrium price.
1
, Economics Ch 4
4.2 Demands
Demand flows from decisions about which wants to satisfy, given the available means. If
you demand something, it means that you intend to buy it and have the means to do so.
When we talk about demand, were referring to the quantities of a good or service that
the potential buyers are willing and able to buy. Demand is only effective if the consumer
is able and willing to pay for the good or service concerned.
Demand is measured over a period. We should always specify the time dimension.
Demand relates to the plans of households, firms and other participants of the economy.
The fact that demand relates to plans means that the quantity is demanded may differ
from the quantity actually bought. Demand can be expressed in words, schedules, curves
and equations.
Because we are dealing with microeconomics, we focus on the demand for particular
goods and services. The total / aggregate demand for all goods and services in the
economy is examined in macroeconomics.
Market demand
What determines the quantity of a product that a households plan to purchase in a
particular period?
- The price of the product
- Prices of related products
- The income of consumers
- The preference of the consumers
- The number of households
One thing that does not determine demand is the availability or supply of a product.
Demand decisions are independent of the supply situation.
The quantity of a good demand in a particular period depends on the price of
the good, the prices of related goods, the income of the households,
consumer’s taste, the number of consumers and any other possible influence.
Symbols used to denote variables
Qd – quantity demanded
Px – price of the product
Pg – prices of related goods
Y – income of households
T – taste/preference of consumers
N – number of consumers in the market
.... – allowance for other possible influences
Given all the symbols above, we can express the demand function/equation as Qd = f
(Px, Pg, Y, T, N,...)
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