#2 Flashcards
What is demand?
The various quantities of a good or service a consumer is willing and able to buy at different possible prices during a particular time period, ceteris paribus.
What is the law of demand?
Price and quantity demanded have an inverse relationship: as price increases, quantity demanded decreases, and vice versa.
What are the non-price determinants of demand? (6)
N: Normal goods (income increases → demand increases).
I: Inferior goods (income increases → demand decreases).
T: Tastes and preferences.
S: Substitutes (price of one good decreases → demand for the other good decreases).
C: Complements (price of one good decreases → demand for the other good increases).
N: Number of consumers.
What is diminishing marginal utility? (2)
As consumption of a good increases, the additional satisfaction (marginal utility) decreases. This underlies the law of demand, as consumers are willing to buy additional units only if prices fall.
What is supply?
The various quantities of a good or service a firm is willing and able to produce and supply to the market at different prices during a particular time period, ceteris paribus.
What is the law of supply?
There is a positive relationship between price and quantity supplied: as price increases, quantity supplied increases, and vice versa.
What are the non-price determinants of supply? (9)
C: Competitive supply (resources used for one good reduce supply of another).
J: Joint supply (producing one good increases supply of another, e.g., milk → cheese).
S: Shocks (unpredictable events affect supply).
F: Cost of factors of production (higher costs → lower supply).
I: Indirect Taxes (indirect taxes increase costs → lower supply).
N: Number of firms.
E: Expectations of future prices (expect higher prices → lower current supply).
S: Subsidies (lower costs → higher supply).
T: Technology (better tech → lower costs → higher supply).
“C.J.’S FINEST”
What is market equilibrium?
The point where quantity demanded equals quantity supplied (Qd = Qs) at a specific price level.
Demand and supply during disequlibrium
Excess supply (surplus): Price is above equilibrium, so Qs > Qd.
Excess demand (shortage): Price is below equilibrium, so Qd > Qs.
How does price act as a signal?
Prices convey information to producers and consumers.
Higher prices: Signal producers to increase supply and consumers to decrease demand.
Lower prices: Signal producers to decrease supply and consumers to increase demand.
Price as a Rationing Function
When resources are scarce, prices rise to ration goods to those who are willing and able to pay.If the commodity is limited price increases, vice versa it decreases
The highest payer wins
What is non-price rationing?
(3 examples)
Allocation of goods without using prices, often due to shortages. Methods include:
Queues (first-come, first-served).
Random allocation (lottery).
Favoritism (preferred buyers).
What is consumer surplus?
The difference between the highest price consumers are willing to pay and the price they actually pay. Represented as the area under the demand curve and above the market price.
What is producer surplus?
The difference between the price producers receive and the lowest price they are willing to accept. Represented as the area above the supply curve and below the market price.
What is allocative efficiency?
Achieved when the quantity of goods produced is most desired by society, where MB = MC (marginal benefit = marginal cost).
