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Demand & Supply
LC Economics
| Term | Definition |
|---|---|
| Individual demand | The quantity of a good an individual consumer demands at different prices. |
| Market demand | The total quantity of a good that all consumers demand at different prices. |
| Effective demand | Demand supported by the necessary purchasing power. Where one wishes to have a good but also has the means to buy the good. |
| Latent demand | This exists when there is willingness to buy among people for a good or service, but where consumers lack the purchasing power to be able to afford the product. |
| Derived demand | Where a factor or production (land, labour, capital and enterprise) is demanded not for its own use but for its contribution to the production process. |
| The Law of Demand | An increase in price leads to a decrease in quantity demanded, or a decrease in price leads to an increase in quantity demanded, ceteris paribus |
| Ceteris paribus | All other things being equal |
| Giffen Goods | Exception to the law of demand. Staple necessity goods with few substitutes in low income economies. As price goes up demand does not decrease as people stop buying other goods in order to purchase the necessity. |
| Snob Goods | Exception to the law of demand. A rise in price makes these goods more exclusive, and therefore more price may lead to a fall in quantity demanded as they may no longer appear as exclusive to the rich and are still outside the price range of the poor. |
| Goods affected by future expectations | Exception to the law of demand. If prospective consumers think that prices are likely to be even higher in the future, the current level of demand may not fall even if prices increase |
| Factors influencing Demand | Price, Income, Price of Substitutes and Complements,Consumer Taste, Expectation about the Future, Government Regulations |
| Substitution effect | The substitution effect is always positive. i.e. it always behaves in the same way. When the price of a product rises, consumers will demand less of it and switch to cheaper substitutes. |
| Income effect | The income effect can be positive or negative. It does not always behave in the same way. When a consumer’s real income increases they buy more normal goods but less inferior goods. |
| Movement along a Demand Curve | Caused by the change in the price of a goods. Leads to extensions and contractions in quantity demanded. |
| Shift in a Demand Curve | Caused by the change in any factor other than price of the good. |
| Individual supply | The quantity of a good an individual firm is willing to supply at different prices |
| Market supply | The total quantity of a good that all firms are willing to supply at different prices |
| Law of Supply | There is a positive relationship between the price of a good and the quantity supplied of that good i.e. if the price rises quantity supplied rises and if price falls quantity supplied falls, ceteris paribus |
| Factors that influence supply | Price, Cost of Production, Technology Available, Price of Related Goods, Taxation, Number of Sellers, Objectives of the Firm |
| Equilibrium | Where quantity demanded equals quantity supplied and there is no tendency for prices to change |
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