Knowledge Organiser

The quantity of a good or service that consumers are willing and able to purchase at any given price in a given time period.

The demand that an individual will have for goods and services at any given price.

The sum of of the individual demand of all the consumers in the market.

The consumer has the ability to pay for the product

When demand for one product is driven by the demand for another product.

Ceteris paribus, there is an inverse (negative) relationship between quantity demanded and the price of a good or service.

Latin for "holding other things constant". Meaning that when we change one variable, we assume all other variables are the same as they were.

The utility you get from consuming the next unit.

As we consume more of a product, the utility we get from consuming the next product deceases.

A higher price means the product now has a higher opportunity cost (in terms of other products). Consumers would now rather purchase these other products and buy less of the product that increased in price. (Even if they had a higher income, they would still prefer the other products)

A higher price means the consumers' real income is lower. They feel poorer, so they buy less of the product.

An increase in price

A decrease in price

-Income -Price of Complements -Price of Substitutes -Tastes and Fashion

Goods which are used together. e.g. tennis balls and tennis rackets

Goods that can be used as a replacement for each other because they serve the same purpose e.g. Coke and Pepsi

Demand curve shifts right

Demand curve shifts left

Demand curve shifts right

Demand curve shifts left

Shift right

No change in Demand curve. Quantity Demanded decreases (contraction/ movement along Demand Curve)

No change in Demand curve. Quantity Demanded increases (extension/ movement along Demand Curve)

A firm is a business It seeks to maximise profit

Supply is the quantity of a good or service that producers are willing and able to supply onto the market at any given price in a given time period.

The cost to a business of producing one more unit of production

Because of diminishing returns to the variable factor. "Too many cooks spoil the broth" As you increase output (in the short run) workers get in each other's way and become less productive, increasing the cost of producing the next unit.

-Selling at higher prices means more profit -Higher prices make up for increased marginal cost

A decrease in price

An increase in price

→ Technology → Expectations → Number of Sellers → Prices of other Goods → Input prices → Taxes and Subsidies

Shift right (More will be produced at any given price)

Shift right (More will be produced at any given price)

Shift left (Less will be produced at any given price)

Shift up Whatever price the producer was willing to sell at is now effectively higher, as tax must be added.

Shift down Whatever the price the producer was willing to sell at is now effectively lower, because the government is paying for production of the product.

Goods with constant marginal cost i.e. good where you can increase production without seeing bottlenecks in production (e.g. Spotify)

Firms can increase production and their marginal cost doesn't increase (e.g. Spotify)

Goods which are in fixed supply i.e. you cannot increase supply e.g. Picasso paintings, concert seats, pumpkins (in the short term)

At this point price is too high; supply is greater than demand. There is a 'glut' in the market. Sellers realise they have produced too much and lower prices. There is an extension on the demand curve and contraction in supply curve. Price will lower until equilibrium is reached.

At this point price is too low; demand is greater than supply. There is a 'shortage' in the market. Sellers realise they have produced too few products and raise prices. There is an contraction in the demand curve and an extension in supply curve. Price will rise until equilibrium is reached.

A movement along a curve occurs when price changes. A shift in the curve occurs when something besides price changes.

→ Demand shifts left → Lower Price → Lower Quantity

→ Demand shifts right → Higher Price → Higher Quantity

→ Supply shifts left → Higher Price → Lower Quantity

→ Supply shifts right → Lower Price → Higher Quantity

→ Demand shifts right → Supply shifts right → Price is unambiguously higher → Quantity may be higher or lower (depending on strength of shifts)

The difference between what a consumer is willing to pay for a product and the price they actually pay.

The difference between the price received by firms for a good or service and the price at which they would have been prepared to supply the good or service.

Allocative efficiency occurs where consumer and producer surplus (community surplus) is maximised.

The responsiveness of one variable to a change in another variable.

more . . . proportionally

less ... proportionally

True The law of demand states that we have an inverse relationship between price and quantity demanded.

Percentage Change Qd / Percentage Change Price

increases

decreases

decreases

increases

-∞ to -1

-1 to 0

0

-∞

-1

-Availability of substitutes -The necessity of the item -Price in relation to income -Time -Breadth of product definition

Elastic

Inelastic

Inelastic

Elastic

Inelastic

elastic

inelastic

-1 . . . unit elastic

-1

Percentage Change Qd / Percentage Change Income

Goods where Quantity Demanded increases as income increases

Goods where Quantity Demanded decreases as income increases

0 to ∞ (Positive figure)

-∞ to 0 (Negaitive figure)

1 to ∞

-∞ to -1 and 1 to ∞

-1 to 1

Percentage Change QdGoodA / Percentage Change PGoodB

Percentage Change Qs / Percentage Change Price

→ Per Unit (Marginal) Costs → Time Horizon → How much it demands from its input markets → Agricultural Goods (I) vs Factory Goods (E) → Scope (Geographic Scope) of the market → Spare production capacity → Ease of factor substitutability/factor mobility → Stocks of finished products and components