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(504) Economics and Society > 03 Supply and Demand > Flashcards

03 Supply and Demand Flashcards

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1
Q

Substitutes

A

A good for which demand will increase if the price of a related good increases.

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2
Q

Complements

A

Two goods are complements if an increase in the price of one good leads to a decrease in the demand for the other (or a demand in the price of one good leads to an increase in the demand for the other).

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3
Q

Shortage

A

Implies that the quantity demanded is greater than the quantity supplied, indicating that the price is below equilibrium price.

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4
Q

Reservation price

A

A limit on the price of a good or service.

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5
Q

Demand curve

A

Illustrates the quantity buyers would purchase at each possible price, has a negative slope (consumers buy less at high price, more at lower price) (lower prices bring more buyers into market, lower prices cause existing buyers to buy more)

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6
Q

Motivation of buyers and sellers

A

Buyers want to benefit from the good, sellers want to make a profit

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7
Q

Market price balances two forces

A

Value buyers derive from the good

The cost to produce the good

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8
Q

The substitution effect

A

Buyers switch to substitutes when price goes up

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9
Q

The income effect

A

Buyers’ overall purchasing power goes down

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10
Q

The Low-Hanging Fruit Principle

A

Explains the upward sloping supply curve

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11
Q

Supply curve

A

Illustrates the quantity of a good that sellers are willing to offer at each price (if price is more than op cost, offer more)

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12
Q

Equilibrium

A

A system is in equilibrium when there is no tendency for it to change
Results from interaction of buyers and sellers

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13
Q

The equilibrium price

A

The price at which the supply and demand curves, no tendency to change price or quantity (quantity supplied equals quantity demanded)

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14
Q

The equilibrium quantity

A

The quantity at which the supply and demand curves intersect

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15
Q

The market equilibrium

A

Occurs when all buyers and sellers are satisfied with their respective quantities at the market price

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16
Q

Price ceiling

A

A maximum allowable price, set by law (e.g. rent controls)

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17
Q

If the controlled price is below equilibrium then..

A

Quantity demanded increases
Quantity supplied decreases
A shortage results, excess demand

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18
Q

Price floor

A

A minimum allowable price, set by law (e.g. minimum wage prevents employers offering low wages)

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19
Q

If the controlled price is above equilibrium then…

A

Quantity demanded decreases
Quantity supplied increases
A surplus results, excess supply

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20
Q

Incentive principle: excess demand

A

Each supplier has an incentive to increase the price in order to sell more

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21
Q

A change in the quantity demanded….

A

Results from a change in the price of a good

22
Q

If buyers are willing to buy more at each price then…

A

Demand has increased (move the entire demand curve to the right) (less = decrease in demand)

23
Q

When price goes up…

A

Quantity supplied goes up

Sellers move to a new, higher quantity supplied

24
Q

Supply increases when…

A

Sellers are willing to offer more for sale at each possible price (moves entire supply curve to right)

25
Q

Supply decreases when…

A

Sellers are willing to offer less for sale at each possible price (moves entire supply curve to left)

26
Q

Causes of shifts in demand

A 
Price of complementary goods
Price of substitute goods
Income: normal or inferior goods?
Preferences
Number of buyers in the market
Expectations about the future
27
Q

Normal good

A

A good for which demand increases when income rises and for which demand decreases when income falls.

28
Q

Inferior good

A

A good for which demand decreases when income rises and for which demand increases when income falls.

29
Q

Causes of shifts in supply

A 
Change in the price of an input
A change in technology
Weather
Number of sellers in the market
Expectation of future price changes
30
Q

Supply and Demand Shifts Rule One

A

An increase in demand will lead to an increase in both equilibrium price and quantity

31
Q

Supply and Demand Shifts Rule Two

A

A decrease in demand will lead to a decrease in both equilibrium price and quantity

32
Q

Supply and Demand Shifts Rule Three

A

An increase in supply will lead to a decrease in the equilibrium price and an increase in the equilibrium quantity

33
Q

Supply and Demand Shifts Rule Four

A

A decrease in supply will lead to an increase in the equilibrium price and a decrease in the equilibrium quantity

34
Q

Buyer’s surplus

A

Buyer’s reservation minus the market price

35
Q

Seller’s surplus

A

Market price minus the seller’s reservation price

36
Q

Total surplus

A

= Buyer’s surplus + seller’s surplus

37
Q

No cash on the table..

A

When surplus is maximised

No opportunity to gain from additional sales or purchases

38
Q

Efficiency Principle

A

The socially optimal quantity maximises total surplus for the economy from producing and selling a good

39
Q

Economic efficiency

A

All goods are produced at their socially optimal level

40
Q

Efficiency Principle: equilibrium price and quantity are efficient if..

A

Sellers pay all the costs of production

Buyers receive all the benefits of their purchase

41
Q

Efficiency

A

Marginal cost equals marginal benefit

Production is efficient if total surplus is maximised

42
Q

Equilibrium Principle

A

A market in equilibrium leaves no unexploited opportunities for individuals
BUT it may not exploit all gains achievable through collective action

43
Q

Seller’s reservation price

A

The smallest dollar amount for which a seller would be willing to sell an additional unit, which is generally the same as their opportunity cost of producing an additional unit.

44
Q

Cost of production affects the supply of a product

A

An increase in input prices will cause a decrease in supply (shift leftward)
A decrease in input prices will increase supply (shift right)

45
Q

Supply increase

A

Then the equilibrium price will decrease, causing the quantity demanded to increase.

46
Q

Feature of free markets

A

Individual incentives will lead markets to their respective equilibrium prices and quantities

47
Q

Buyer’s reservation price

A

The largest dollar amount the buyer would be willing to pay for a good.

48
Q

Change in price and change in demand

A

A change in price leads to a change in quantity demanded, which is represented by movement along a demand curve; a change in demand is a shift in the entire curve.

49
Q

A socially optimal outcome…

A

Maximises total economic surplus

50
Q

Centralised economy

A

An individual or a small group of individuals make its economic decisions (decide what, how, and for whom to produce.)

(504) Economics and Society (12 decks)

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