2 - Supply and Demand Flashcards
(125 cards)
1
Q
What is Qd?
A
The quantity demanded is the amount of a good that consumers are willing to buy at a given price during a specified period, holding constant other factors which influence Qd..
2
Q
What is the main factor which potential consumers base their decisions on?
A
Price
3
Q
What 6 other main factors influence consumer decisions?
A
- Consumer tastes
- Information
- Income
- Prices of substitutes
- Prices of complements
- Government action
4
Q
What does the demand function show?
A
The correspondence between the Qd, price, and other factors that influence purchases.
5
Q
What would a typical demand function describing what consumption depends on look like?
A
Qd = D(p,ps,pc,Y)
6
Q
What would a typical demand function describing that consumption depends on price, price of substitutes, price of complements and income look like?
A
Q = constant - ap + bps - cpc + dY
7
Q
Why is the price (of the good in question) variable of a demand function always negative?
A
Because of the law of demand, Qd and P are negatively related.
8
Q
Why is the price of a close substitute variable of a demand function always positive?
A
Because as the price of the close substitute rises, the good in question seems more attractive and vice versa.
9
Q
Why is the price of a complementary good variable of a demand function always negative?
A
As the price of the complement rises, the good in question becomes more expensive and vice versa. It acts as the price of the good itself does.
10
Q
Why is the income variable of a demand function always positive?
A
Because income is always positive.
11
Q
Why do economists hold constant the effects of some factors?
A
So that they can determine how an individual variable affects Q.
12
Q
How do economists hold constant the effects of some factors?
A
By taking partial derivatives.
13
Q
How can we graphically show the relationship present within a given demand function?
A
With a demand curve.
14
Q
What is a demand curve?
A
A plot of the demand function that shows the quantities demanded at each possible price, holding other factors constant.
15
Q
How is a change in a product’s price reflected on a demand/supply curve?
A
As a movement along the curve.
16
Q
What is the law of demand?
A
Consumers demand more of a good the lower its price, holding constant other factors that influence the amount they consume.
17
Q
What is a mathematical way of stating the law of demand?
A
The derivative of the demand function with respect to price is negative.
18
Q
Why does dQd/dP illustrate the law of demand?
A
Because the derivative of the demand function with respect to price shows the movement along the demand curve as price varies.
19
Q
How is the slope of the demand curve related to the derivative of the demand function with respect to price?
A
The slope of the demand curve is the reciprocal of the derivative of the demand function.
20
Q
Why is the slope of the demand curve the reciprocal of the derivative of the demand function?
A
Because we put price on the vertical axis and quantity on the horizontal axis.
slope = dp/dQ = 1/(dQ/dp)
21
Q
What causes the demand curve to shift?
A
A change in any factor other than the price of the good itself.
22
Q
How do we represent the addition of one demand/supply curve to another graphically?
A
By summing the Q’s horizontally.
23
Q
What is Qs?
A
The quantity supplied is the amount of a good that firms want to sell during a given period at a given price, holding constant other factors which influence Qs.
24
Q
What is the main factor which potential producers base their decisions on?
A
Price
25
What 2 other main factors influence producer decisions?
- Production cost
| - Government rules and regulation
26
What does the supply function show?
The correspondence between the Qs, price, and other factors that influence the number of units offered for sale.
27
What would a typical supply function describing what consumption depends on look like?
Qs = S(p,pc)
28
What would a typical supply function describing that production depends on price and costs of production look like?
Q = constant + ap - bpc
| where pc is the price of a major input into production.
29
Why is the production cost variable of a supply function always negative?
Because as the cost of production rises, the good in question generates less profit and vice versa.
30
How can we graphically show the relationship present within a given supply function?
With a supply curve.
31
What is a supply curve?
A plot of the supply function that shows the quantities supplied at each possible price, holding other factors constant.
32
What is a main difference in the law of supply from the law of demand?
There is no "law of supply" which requires the supply curve to have a particular slope.
33
What are the possible supply curve slopes?
The market supply curve can be upward sloping, vertical, horizontal or downward sloping.
34
How can we determine how far a supply/demand curve shifts as a variable other than price changes?
By partially differentiating the supply/demand function with respect to the changing variable.
35
What is an implication of the fact that, in the textbook example, the total supply curve is the horizontal sum of the domestic and foreign supply curves?
The total supply curve is flatter than either of the two supply curves.
36
How do we mathematically solve for market equilibrium?
By using the demand and supply functions to solve for the equilibrium price at which Qs = Qd. Then, we substitute peq in either equation to find Qeq.
37
What causes the market to be in equilibrium?
If the price were not at the equilibrium level, consumers and firms would have an incentive to change their behavior in a way that would drive the price to the equilibrium level.
38
What is excess demand?
The amount by which the quantity demanded exceeds the quantity supplied at a specified price.
39
What is excess supply?
The amount by which the quantity supplied exceeds the quantity demanded at a specified price.
40
When would an equilibrium change?
If a shock occurs so that one of the variables we were holding constant changes, causing a shift in either the demand or supply curves.
41
What is comparative statics?
The method used by economists to analyze how variables controlled by consumers and firms (p and Q) react to a change in exogenous variables (environmental variables) that they do not control.
42
What are 4 exogenous variables considered in this chapter?
- Prices of substitutes
- Prices of complements
- Consumer income level
- Prices of production inputs
43
How can we determine the comparative statics properties of an equilibrium by examining the effects of a discrete (relatively large) change in one environmental variable?
By solving for the before-and-after equilibria and comparing them using mathematics or a graph.
44
How can we determine the comparative statics properties of an equilibrium by examining the effects of a small change in one environmental variable?
By using calculus to determine the effect of a small change in one environmental variable, holding the other such variables constant.
45
Show how the calculus works when an exogenous variable a (which affects input prices) changes. Continue from:
Q = D(p) ; Q = S(p,a)
Equate them to make
D(p) = S(p,a)
This is an identity: as a changes, p changes so that the equation continues to hold. Thus, we write equilibrium price as an implicit function of the environmental variable:
p = p(a) Therefore:
D(p(a)) = S(p(a),a)
Then differentiate this equation with respect to a using the chain rule.
46
What is the derivative of
D(p(a)) = S(p(a),a)
using the chain rule?
dD(p(a))/dp X dp/da
=
('dS(p(a),a)/'dp)(dp/da) + 'dS(p(a),a)/'da
47
Why do the shapes of demand and supply curves matter?
Because the shapes and positions of the demand and supply curves determine by how much a shock affects the equilibrium price and quantity.
48
How would a supply shock affect a vertical demand curve differently than a downward sloping one?
P rises/falls by more when the demand curve is vertical instead of downward sloping, but q remains the same.
49
How would a supply shock affect a what consumers pay differently if they have a horizontal demand curve as opposed to a downward sloping one?
Q rises/falls by more than when the demand curve is vertical or downward sloping, but p remains the same.
50
What is an elasticity?
The percentage change in one variable in response to a given percentage change in another variable, holding other relevant variables constant.
51
What is the formula for an elasticity E?
E = (%Δz)/(%Δx) = (Δz/z)/(Δx/x) = ('dz/'dx)(x/z)
52
What is the price elasticity of demand, or simply the demand elasticity or elasticity of demand?
The percentage change in the quantity demanded, Qd, in response to a given percentage change in the price, p, at a particular point on the demand curve.
53
What is the formula for the price elasticity of demand?
ε = (%ΔQ)/(%Δp) = (ΔQ/Q)/(Δp/p) = ('dQ/'dp)(p/Q)
Where 'dQ/'dp is the partial derivative of the demand function with respect to p, that is, holding constant other variables that affect the quantity demanded.
54
Describe a linear demand function where Qd = a - bp.
For a linear demand function Qd = a - bp, a is the quantity demanded when the price is zero and b is the ratio of the fall in the quantity relative to the rise in price: the derivative dQ/dp.
55
What is the ε for a linear demand function Qd = a - bp where a is the quantity demanded when the price is zero and b is the ratio of the fall in the quantity relative to the rise in price: the derivative dQ/dp?
ε = (dQ/dp)(p/Q) = -b(p/Q)
56
What does the negative sign on the formula for elasticity of demand ε = -b(p/Q) illustrate?
The law of demand: Less quantity is demanded as the price rises.
57
Which question does the elasticity of demand concisely answer?
How much does the quantity demanded of a product fall in response to a 1% increase in its price?
A 1% increase in price leads to an ε% change in the quantity demanded.
58
The elasticity of demand varies along most demand curves. How is it distributed then?
On downward sloping linear demand curves that are neither vertical nor horizontal, the higher the price, the more negative the elasticity of demand.
59
What is ε where a linear demand curve hits the quantity axis (p=0 and Q=a)?
ε = -b(0/a) = 0
60
When is a demand curve said to be perfectly inelastic?
A demand curve said to be perfectly inelastic at a point where the elasticity of demand is zero.
61
What is a physical analogy to perfect inelasticity?
If you try to stretch an inelastic steel rod, the length does not change. The change in the price is the force pulling at demand; if the quantity demanded does not change in response to this force, the demand curve is perfectly inelastic.
62
What is ε for quantities between the midpoint of the linear demand curve and the lower end, where Q=a?
0 > ε > -1
| A point along the demand curve where the elasticity is between 0 and -1 is inelastic (but not perfectly inelastic)
63
What is ε for quantities at the midpoint of the linear demand curve, where p = a/(2b) and Q = a/2?
ε = -bp/Q = -b[a/(2b)]/(a/2) = -1.
| Such an elasticity of demand is called a unitary elasticity.
64
What is ε for prices above the midpoint of the linear demand curve?
At prices higher than at the midpoint of the demand curve, the elasticity of demand is less than negative one, ε < -1.
In this range, the demand curve is called elastic.
65
What happens to ε as price rises?
As the price rises, the elasticity gets more and more negative, approaching negative infinity. Where the demand curve hits the price axis, it is perfectly elastic.
66
The elasticity of demand varies along most demand curves, not just downward sloping ones. What's an exception to this?
Along a special type of demand curve, called a constant-elasticity demand curve, the elasticity is the same at every point along the curve.
67
What is the exponential form characteristic to all constant-elasticity demand curves?
Qd = Ap^ε
| where A is a positive constant and ε, a negative constant, is the elasticity at every point along this demand curve.
68
How can we rewrite the equation Qd = Ap^ε
By taking natural logarithms of both sides, we can rewrite this exponential demand curve as a log-linear demand curve
lnQ = lnA + εlnp
69
There are many different constant-elasticity demand curves with different elasticities. How can we characterize them graphically?
Except for the vertical and horizontal demand curves, the curves are convex to the origin (like indifference curves).
70
What is the elasticity at any point along a horizontal demand curve?
Infinity
71
Along the horizontal demand curve, people are willing to buy as much as firms sell at any price less than or equal to p*. How does this relate to its elasticity?
If the price increases even slightly above p*, however, demand falls to 0. Thus, a small increase in price causes an infinite drop in the quantity demanded, which means that the demand curve is perfectly elastic.
72
What's one reason why a demand curve would be horizontal?
One reason is that consumers view one good as identical to another good and do not care which one they buy.
73
What is the elasticity at any point along a vertical demand curve?
The vertical demand curve is perfectly inelastic everywhere so ε=0. As the price goes up, the quantity demanded is unchanged dQ/dP = 0 so the elasticity of demand must be 0:
ε = (dQ/dP)(p/Q) = 0 x (p/Q) = 0
74
What's one reason why a demand curve would be vertical?
A demand curve is vertical for essential goods - goods that people feel they must have and will pay anything to get.
75
We refer to the price elasticity of demand as the elasticity of demand, but what are 2 other elasticities of demand?
Income elasticity of demand
| Cross-price elasticity of demand
76
What is the income elasticity of demand?
A measure of how sensitive the quantity demanded at a given price is to income, which is a percentage change in the quantity demanded in response to a given percentage change in income Y.
77
What is the formula for income elasticity of demand?
ξ = (%ΔQ)/(%ΔY) = (ΔQ/Q)/(ΔY/Y) = ('dQ/'dY)((Y/Q)
| Where ξ is the greek letter xi.
78
When is income elasticity of demand negative, zero, or positive?
If the Qd increases as income rises, ξ>0.
If the Qd is unaffected as income rises, ξ=0.
If the Qd decreases as income rises, ξ<0.
79
What does a positive income elasticity mean?
That an increase in income causes the demand curve to shift to the right.
80
How do income elasticities play an important role in our analysis of consumer behavior in chapter 5?
Typically, goods that consumers view as necessities, such as food, have income elasticities near zero. Goods that they consider luxuries generally have income elasticities greater than one.
81
What is cross-price elasticity?
The percentage change in the quantity demanded in response to a given percentage change in the price of another good.
82
What's the expression for the cross-price elasticity of demand?
cross-price elasticity = (%ΔQ1)/(%Δp2) = (ΔQ1/Q1)/(Δp2/p2) = ('dQ1/'dp2)((p2/Q1)
83
When is the cross price elasticity negative?
For complements. If the cross-price elasticity is negative, people buy less of one good when the price of the other, second good increases: The demand curve for the first good shifts to the left.
84
When is the cross price elasticity positive?
For substitutes. As the price of the second good increases, people buy more of the first good.
85
What is the price elasticity of supply, or simply the supply elasticity or elasticity of supply?
The percentage change in the quantity supplied, Qs, in response to a given percentage change in the price, p, at a particular point on the supply curve.
86
What is the expression for the price elasticity of supply?
η = (%ΔQ)/(%Δp) = (ΔQ/Q)/(Δp/p) = ('dQ/'dp)(p/Q)
| where Q is the quantity supplied. If n=2, a 1% increase in price leads to a 2% increase in the quantity supplied.
87
When is η>0?
When the supply curve is upward sloping, ('dp/'dQ)>0, so η>0.
88
When is η<0?
When the supply curve is downward sloping, ('dp/'dQ)<0, so η<0.
89
What do we call a point on a supply curve where the elasticity of supply is η=0?
Perfectly inelastic. The supply does not change as the price rises.
90
When is a supply curve inelastic?
If 0
91
When is a supply curve elastic?
If η>1, the supply is elastic.
92
When is a supply curve infinitely elastic?
If η=∞
93
For which curves does supply elasticity not vary?
The supply elasticity does not vary along constant-elasticity supply functions, which are exponential or (equivalently) log-linear:
Q=Bp^η or
lnB + ηlnp.
94
What does it mean for η to be a positive, finite number for a constant-elasticity supply function?
It starts at the origin.
95
What kind of supply curve is perfectly inelastic?
A vertical one. No matter what the price, the firm supplies Q.
96
What's an example of a good with a inelastic supply?
Perishable items such as already-picked fresh fruit. If it isn't sold, it quickly becomes worthless.
97
What kind of supply curve is perfectly elastic?
A horizontal one. Firms supply as much as the market wants - a potentially unlimited amount - if the price is p* or above. Firms supply nothing at a price below p*, which does not cover their cost of production.
98
What are two factors that determine whether short-run demand elasticities are larger or smaller than long-run elasticities?
The ease of substitution and storage opportunities. Often we can substitute products in the long=run but not in the short-run
99
How may short-run supply curve elasticies differ from short-run supply curve elasticies?
If a manufacturing firm wants to increase production in the short run, it an do so by hiring workers to use its machines around the clock. However, how much it can expand its output is limited by the fixed size of its manufacturing plant and the number of machines it has.. In the long run, however, the firm can build another plant and buy or build more equipment. Thus, we would expect a firm's long-run supply elasticity to be greater than it is in the short-run.
100
What does how much a tax affects the equilbrium price and quantity and how much of the tax falls on consumers depend on?
The elasticities of demand and supply. Knowing only the elasticities of demand and supply, we can make accurate predictions about the effects of a new tax and determine how much of the tax falls on consumers.
101
What are the two types of sales taxes that governments use?
The most common is called an ad valorem tax by economists and the sales tax by real people.
The other is a specific tax or unit tax.
102
What is an ad valorem tax?
For every dollar that a consumer spends, the government keeps a fraction, α, which is the ad valorem tax rate.
103
What is a specific tax?
A tax where a specified dollar amount, t, is collected per unit of output.
104
How does a specific tax collected entirely from firms affect the demand and supply graphically?
The after-tax supply curve is τ above the originial supply curve at every quantity.
105
Which formula allows us to see the incidence of a tax on consumers?
dp/dτ = η/(η-ε)
106
Which formula allows us to see the incidence of a tax on producers?
1 - dp/dτ = 1 - η/(η-ε)
107
What does the equation dp/dτ = η/(η-ε) show?
For a given η, the more elastic the demand, the less the equilibrium price rises when a tax is imposed. Similarly, for a given ε, the smaller the supply elasticity, the smaller the increase int he equilibrium price that consumers pay when a tax is imposed.
108
What is a special feature of specific taxes?
A specific tax, regardless of whether the tax is collected from consumers or producers, creates a wedge equal to the pre-unit tax of τ between the price consumers pay, p, and the price producers receive, p-τ. In short, regardless of whether firms or consumers pay the tax to the government, you can solve tax problems by shifting the supply curve, shifting the demand curve, or inserting a wedge between the supply and demand curves. All three approached give the same answer.
109
Suppose the government imposes an ad valorem tax of α, instead of a specific tax, on the price that consumers pay for processed pork. We already know that the equilibrium price is $4 with a specific tax of 1.05 per kg. Which ad valorem tax collect an amount equal to a specific tax of 1.05/kg?
α = $1.05/$4 = 26.25% raises the same amount of tax per unit as a $1.05 specific tax.
The incidence of an ad valorem tax is usually shared between producers and consumers.
110
When may Qs not equal Qd?
With a binding price ceiling or binding price floor.
111
What is a price ceiling?
A price ceiling limits the amount that can be charged for a product.
112
How does the price ceilings affect market outcomes?
The ceiling doesn't affect market outcomes if it is set above the equilibrium price that would be charged in the absence of the price control.
113
What do binding price ceilings cause?
Shortages.
114
What do binding price floors cause?
Surpluses
115
What is on of the most important examples of a price floor?
The minimum wage in labor markets.
116
How do minimum wages affect market outcomes?
If the minimum wage binds - exceeds the equilibrium wage, w* - the minimum wage causes unemployment, which is a persistent excess supply of labor.
117
How does minimum wage lead to unemployment?
The minimum wage prevents market forces from eliminating the excess supply, so it leads to an equilibrium with unemployment.
118
What is a perfectly competitive market?
One in which all firms and consumers are price takers: No market participants can affect the market price.
119
What are the 5 characteristics of perfectly competitive markets?
1. There are many small buyers and sellers
2. All firms produce identical products
3. All market participants have full information about prices and product characteristics.
4. Transaction costs are negligible.
5. Firms can easily enter and exit the market.
120
In which markets are firms price setters?
Monopolies and Oligopolies.
121
What is a monopoly?
A price setter which benefits from being the only supplier in a market.
122
What is an oligopoly?
A market with only a small number of firms - or in a markets in which they sell differentiated products, and consumers prefer one product to another.
123
How is the market price in monopolies and oligopolies relative to perfect competition?
Generally higher.
124
What are transaction costs?
The expenses, over and above the price of the product, of finding a trading partner and making a trade for the product. These costs include the time and money spent gathering information about a product's quality and finding someone with whom to trade.
125
In which markets is the supply and demand model useful?
Markets in which the supply-and-demand model has proven useful - markets with many firms and consumers and in which firms sell identical products - include agriculture, finance, labor, construction, services, wholesale, and retail.
