o General relationship between price and consumption: When the price of a good
rises, the quantity demanded (=Amount consumers are willing and able to
purchase at a given price over a given period) will fall Law of demand.
Reasons for this law:
o People will feel poorer = income effect
o The good will now be dearer relative to other goods = substitution effect
o The demand schedule can be presented graphically as a demand curve. Price is on
vertical axis, quantity demanded at horizontal axis.
o Other determinants of demand Not only price:
Tastes: If people desire the good, the more they will demand
Number and price of substitute (=competitive) goods
Number and price of complementary goods: Are consumed
together.
Income: If income rises, the demand will rise for normal goods. If
people get richer, they will spend less on inferior goods.
Distribution of income
Expectations of future price changes
o Movements along and shifts in the demand curve:
o This curve is constructed on the assumption that ‘other things remain
equal’ = ceteris paribus.
o Movement along the curve (=Change in the quantity demanded) Effect
of change in price
o Shift in the demand curve (=Change in demand) Change of other
determinant
o General relationship between price and supply: When the price of a good rises, the
quantity supplied will also rise. Reasons for this:
o As firms supply more, they are likely to find that beyond a certain level of
output costs rise more and more rapidly. If higher output involves higher
costs of production, producers will need to get a higher price.
o The higher the price of the good, the more profitable it become to produce.
o Given time, if the price of a good remains high, new producers will be
encouraged to set up in production.
o Other determinants of supply:
Cost of production. Reasons for change in costs:
Change in input prices Organisational changes
Change in technology Government policy
Profitability of alternative products (=substitutes in supply)
Profitability of goods in joint supply: Sometimes when one good is
produced, another good is also produced at the same time (=goods
in joint supply).
Nature, ‘random shocks’ and unpredictable events
Aims of producers
Expectations of future price changes
Number of suppliers: If new firms enter the market, supply is likely
to rise.
, o Movements along and shifts in supply curve:
o Movement along the curve (=Change in the quantity supplied) Effect of
change in price
o Shift in the demand curve (=Change in supply) Change of other
determinant. Rightward illustrated increase in supply.
o The price where demand equals supply is called the equilibrium price.
o Advantages of free-market economy:
o Functions automatically
o No one has great power
o The more efficiency firms can combine their factors of production, the
more profit they will make
o Helps to minimize the central economic problem of scarcity
o Problems with free-market economy:
o Competition between firms is often limited
o Lack of competition and high profits may remove the incentive for firms to
be efficient
o Power and property may be unequally distributed
o Practices of some firms may be socially undesirable or have adverse
environmental consequences.
o Some socially desirable goods will simply not be produced by private
enterprise
o Free-market economy may lead to macroeconomic instability
o Ethical objection that a free-market economy, by rewarding self-
interested behaviour, may encourage selfishness, greed, materialism and
the acquisition or pursuit of power.
o Explaining ‘irrational’ consumer choices:
o How options are framed: People will make different choices when they are
presented, or framed, in different ways.
o Too much choice: Choice should allow us to maximise our utility by
making ‘better’ decisions.
o Bounded rationally: Sometimes it would be possible to obtain better
information, but the individual decides it is not worth the time and effort
and perhaps expense
o Relatively matters: Income, tastes.
o Herding and groupthink: Being influenced what other people buy.
o Sunk costs: Weight up the marginal costs and benefits. Costs that already
incurred in the past are irrelevant.
Chapter 3:
o If price of good rises, how much will the quantity demanded fall? Want to
know how responsive demand is to a rise in price = Price elasticity of demand
o Measuring the price elasticity of demand: PɛD= % ⍙ Qd / % ⍙ P
o Elasticity is measured in proportions or percentage terms for reasons:
It allows comparison of changes in 2 qualitatively different things; it
allows comparison of quantity changes with monetary changes.
It is the only sensible way of deciding how big a change in price or
quantity is.
o The value:
Elastic demand (ɛ >1) : Bigger change in quantity demanded
Voordelen van het kopen van samenvattingen bij Stuvia op een rij:
Verzekerd van kwaliteit door reviews
Stuvia-klanten hebben meer dan 700.000 samenvattingen beoordeeld. Zo weet je zeker dat je de beste documenten koopt!
Snel en makkelijk kopen
Je betaalt supersnel en eenmalig met iDeal, creditcard of Stuvia-tegoed voor de samenvatting. Zonder lidmaatschap.
Focus op de essentie
Samenvattingen worden geschreven voor en door anderen. Daarom zijn de samenvattingen altijd betrouwbaar en actueel. Zo kom je snel tot de kern!
Veelgestelde vragen
Wat krijg ik als ik dit document koop?
Je krijgt een PDF, die direct beschikbaar is na je aankoop. Het gekochte document is altijd, overal en oneindig toegankelijk via je profiel.
Tevredenheidsgarantie: hoe werkt dat?
Onze tevredenheidsgarantie zorgt ervoor dat je altijd een studiedocument vindt dat goed bij je past. Je vult een formulier in en onze klantenservice regelt de rest.
Van wie koop ik deze samenvatting?
Stuvia is een marktplaats, je koop dit document dus niet van ons, maar van verkoper sasboaz. Stuvia faciliteert de betaling aan de verkoper.
Zit ik meteen vast aan een abonnement?
Nee, je koopt alleen deze samenvatting voor €2,99. Je zit daarna nergens aan vast.
