2nd Test Flashcards
what is demand?
- the want to purchase goods or services
- people must be willing and able to purchase a good or service
the law of demand states…
- as the price of a good increases, the quantity demanded ______
- as the price of a good decreases, the quantity demanded ______
- decreases
- increases
what type of relationship is the law of demand?
inverse
- what is the definition of demand?
* what is the definition of quantity demanded?
- demand is simply the willingness and ability to buy something
- quantity demanded is the # of units purchased at a specific price
what is the law of diminishing marginal utility?
as a person consumes additional units of a good, eventually the utility gained from each additional unit of the good decreases
- the more utility (satisfaction) you receive from a good the…..
- the less utility you receive from a good the…
- higher the price people are willing to pay for it
- lower the price people are willing to pay for it
NOTE
when you talk about price you talk about quantity
when you talk about quantity you talk about price
when demand increases the demand line shifts to the (right/left)
right!
when demand decreases the demand line shifts to the (right/left)
left!
What six factors shift the demand curve?
- Income
- Substitutes
- Complements
- Preferences
- Number of Buyers
- Expectations
what is a normal good?
nice things such as steak or a new car
what is an inferior good?
generic things or things that you settle for because they are cheap such as Ramen noodles, hot dogs
what is a neutral good?
necessary things like medicine
how can income affect the amount of normal, inferior, and neutral goods?
- the demand for normal goods rises as income rises and falls as income falls
- the demand for inferior goods rises as income falls and falls as income rises
- the demand for neutral goods remain the same as income rises and falls
why is demand curve downward sloping?
- income effect- if a products price falls, the purchasing power of a consumer will increase, and therefore, there will be greater quantity demanded at lower prices; the inverse is also true
- substitution effect- if the product price is lower, consumers will shift from purchasing a substitute to buying more of this particular product, therefore, the quantity demanded is higher at lower prices.
- diminishing Marginal Utility- the more additional units a consumer buys of a good, the less marginal utility they receive from it. So to make them buy more of what they are already buying, you have to lower the price
when will the demand line shift to the left?
- when talking about inferior goods = income rises
- when talking about normal goods = income falls
- when preferences fall for the item
- when talking about a compliment = price rises
- when talking about a substitute= price falls
- when number of buyers fall
- when expect future prices to fall
when will the demand line shift to the right?
- when talking about inferior goods = income falls
- when talking about normal goods = income rises
- when preferences rise for the item
- when talking about a compliment = price falls
- when talking about a substitute= price rises
- when number of buyers rise
- when expect future prices to rise
what is supply?
the willingness and ability to produce something at a given range of prices
what is the law of supply?
- as price goes up…quantity supplied goes up
* as price goes down…quantity supplied goes down
what are the non price determinants that shift the supply line?
- cost of inputs (price of labor,etc)
- Productivity (efficiency is good)
- Technology (new machines for example)
- Taxes (taxes go up, supply goes down)
- Subsidies ($ encourages or protects an industry)
- Expectations (expect price to go up hold product, decrease supply)
- government regulations (strict= produce less)
- number of sellers = (more sellers= more supply)
Supply line shifts to left when??
- cost of production rises
- technology falls or fault in tech
- subsidies taken away or lowered
- having a quota
- number of sellers falls
- weather is bad or causes harm
- increase government regulation
- future prices expected to rise
- price rises of a production alternative
supply line shifts to the right when??
- cost of production falls
- technology rises
- subsidies increases or started
- not having a quota
- number of sellers falls
- weather is bad or causes harm
- increase government regulation
- future prices expected to rise
- price rises of a production alternative
to be effective a price ceiling must be _____ equilibrium
below
to be effective a price floor must be ____ equilibrium
above
what is a price ceiling?
maximum legal price a seller can charge for a product…goal is to make things affordable for people
what is a price floor?
minimum legal price a seller can sell a product…goal is to keep price high by keeping price from falling to equilibrium
what is allocatively efficienct
society is properly using their resources
to be efficient what must a market do with CS and PS
maximize consumer and producer surplus
every transaction must have what two things?
buyer and seller
what is the elasticity of demand?
- measurement of consumers’ responsiveness to a change in price
- what will happen if the price increases? how much will it effect quantity demanded?
what is inelastic demand?
quantity demanded is insensitive to a change in price.
- if price increases, quantity demanded will fall a little (but not that much)
- if price decreases, quantity demanded increases a little (but not that much)
- PEOPLE WILL CONTINUE TO BUY IT
what makes inelastic goods be inelastic goods?
- there are few substitutes
- it is a necessity
- small portion of ones income
- required now, rather than later
- elasticity coefficient is less than 1
what is elastic demand?
- quantity is sensitive to a change in price
- if price increases, quantity demanded will fall A LOT
- if price decreases, quantity demanded increases A LOT
- in other words the amount people buy is sensitive to price change
what makes an elastic good an elastic good?
- there are many substitutes
- it is not a necessity but a luxury
- large portion of income
- plenty of time to decide to buy it or not
- elasticity coefficient is greater than 1
what is perfectly inelastic? and what is the coefficient?
- when people will buy whatever the price
* coefficient is 0
what is unit elastic? and what is the coefficient?
*the quantity purchased is completely sensitive to price change
what is total revenue?
the total receipts of a firm from the sale of some given quantity’s of a product
how do you calculate total revenue?
price x quantity
when prices increases which causes TR to decrease this is ______
*when price decreases which causes TR to increase this is also ______
Elastic Demand
- when price increases which causes TR to increase this is ______
- When price decreases which causes TR to decrease as well is also called ______
Inelastic demand
if price changes and TR stays the unchanged this is ______
unit elastic
if the coefficient of Ed
inelastic
if the coefficient of Ed > 1 then it is….
elastic
how does a relatively and perfectly inelastic graph look like
- relatively looks like it wants to become an I
* perfectly looks like it is an I
how does relatively and perfectly elastic look like?
- relatively elastic looks like it wants to become a horizontal line
- a perfectly elastic graph looks like horizontal line
what is the income elasticity equation?
% change in QD / % change in income
what does it mean if the outcome of the income elasticity equation is positive or negative?
- positive = more normal goods
* negative = inferior goods
what is the cross-price elasticity equation?
% change in QD of x / % change in price of y
what does it mean if the outcome of the cross price elasticity equation is positive or negative?
- positive= substitutes
* negative= complements
what is the demand elasticity equation?
% change in QD / % change in price
if the coefficient is greater than 1 what does it mean? less than 1? equals to 1?
- Elastic
- Inelastic
- unit elastic
what is the supply elasticity equation?
% change in QS / % change in price
if the coefficient is greater than 1 what does it mean? less than 1? equals to 1?
- Elastic
- Inelastic
- unit elastic
why are excise taxes imposed?
- discourage consumption
- re distributive goals
- reduce negative externality (externality= the cost or benefit that affects a party who did not choose to incur that cost or benefit)
efficiency loss is also known as….
dead weight loss
which has a smaller efficiency loss? inelastic or elastic demand?
inelastic
how do you calculate marginal revenue?
change in TR / change in Quantity
when marginal revenue crosses _____ this is when TR is the maximum (all seen on a graph)
y=0
what is consumer surplus?
the total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually do pay (i.e. the market price)
what is producer surplus
the difference between the amount the producer is willing to supply goods for and the actual amount received by him when he makes the trade.
