CH3 - Demand, Supply and Price Flashcards
What is quantity demanded?
The amount of a good or service that consumers want to purchase during some time period. It refers to a flow of desired purchases
Name 6 variables that influence demand
- Product’s own price
- Consumer’s income
- Prices of other products
- Consumer’s preferences / tastes
- Population
- Significant changes in weather
Latin expression meaning ‘all things equal’?
Ceteris paribus
What is the difference between flow and stock?
Stock is a value that has meaning at a point in time
examples:
amount of income = flow
expenditure = flow
amount in bank account = stock
How are the price of a product and quantity demanded related?
Price of a product and quantity demanded are relatived negatively - the lower the price, the higher the quantity and vice versa
What is the law of demand?
economic hypothesis is that the price of a product and the quantity demanded are related negatively, other things being equal. That is, the lower the price, the higher the quantity demanded; the higher the price, the lower the quantity demanded.
What does a demand schedule show?
table showing the relationship between quantity demanded and the price of a product, other things being equal
On what axis is the price on a graph?
Vertical axis
On what axis is quantity on a graph?
horizontal axis
What does a negatice slope of a demand curve indicate?
The quantity demanded increases as the price falls
What does a shift to the right in a demand curve indicate?
It indicates an increase in demand
What does a shift to the left in a demand curve indicate?
It indicates a decrease in demand
If the consumers average income increases, how does it affect the demand (curve)?
Normal goods: increase in demand = shifts to the right
Inferior goods: decrease in demand = shift to the left
If the price of two complementary goods falls, how does it affect the demand (curve)?
Increase in demand for both goods = both demand curves shift to the right
How does a consumer’s preference affect the demand curve?
if in favour, shift to the right
if against, shift to the left
How does an increase in population with purchase power affect the demand curve?
The demand curve shifts to the right because the demand increases
Define substitutes in consumption
goods that can be used in place of another good to satisfy similar needs or desires
Define complements in consumption
goods that tend to be consumed together
What is the difference between a movement along the demand curve and a shift of the whole demand curve?
Shift of the entire demand curve = change in demand at every single quantity demanded at every price
Movement along the curve (or to a new one): change in quantity demanded
What does an increase in demand signify?
Demand curve shifts to the right, and hence quantity demanded is higher at each price
What is the definition of quantity supplied?
amount of a good or service that producers want to sell during some time period. It is a flow (unit/time), and is the amount that producers are willing to offer for sale
What are the 7 factors that can influence the quantity supplied of a product?
- Product’s own price
- Prices of inputs
- Technology
- Government taxes or subsidies
- Prices of other products
- Significant changes in weather
- Number of suppliers
In what direction are quantity supplied and price related?
quantity supplied and price are related positively.
the higher the product’s own price, the more its producers will supply; the lower the price, the less its producers will supply
What does a supply schedule show?
Supply schedules show the relationship between quantity supplied of a product and the price of a product
What does the positive slope of a supply curve imply?
The quantity supplied increases when price increases
What do you refer to when talking about conditions of supply?
when talking about conditions of supply, you refer to the entire supply curve to complete the relationship between desired sales and all possible prices of the product
What is an input?
Everything a firm uses to make its products
What effect does a rise in price of inputs have on the supply curve?
It shifts to the left
(higher price of input = less profit = less production)
What effect does a fall in price of inputs have on the supply curve?
It shifts to the right
(lower price of input = cheaper production = more profit)
What effect does changes or innovation in technology have on the supply curve?
It shifts supply curve to the right
What effect does changes or innovation in technology have on the supply curve?
It shifts supply curve to the right
(lower price of input = cheaper production = more profit)
What effect does government taxes have on the supply curve?
It shifts to the left
(sales are less profitable)
What effect does government subsidies have on the supply curve?
It shifts to right
(more profitable)
What happens to the complementary goods x and y when there is a rise in price of good x?
Rise in price of good x leads to an increase in the supply of complementary product y
What happens to substitute products x and y when there is a decrease in the price of y?
A reduction in the price of y leads to an increase in the supply of x
How does the increase or decrease of suppliers affects the supply curve?
Shift to the right = increase in nbr of suppliers
Shift to the left = reduction in nbr of suppliers bc less profitable
What does an increase in supply imply for the demand curve?
an increase in supply means that the whole supply curve has shifted to the right, so that the quantity supplied at any given price has increased; a movement up and to the right along a supply curve indicates an increase in the quantity supplied in response to an increase in the price of the product.
When does excess demand happen, and what effect does it have on the price?
situation in which, at a given price, quantity demanded exceeds quantity supplied
It causes upward pressure on price
When does excess supply happen, and what effect does it have on the price?
situation in which, at the given price, quantity supplied exceeds quantity demanded
It causes downward pressure on price
What is the formula for market equilibrium?
Demand - Supply
positive = excess demand
negative = excess supply
What effect does an increase in demand have on the market equilibrium?
Demand curve shifts to the right
New equilibrium, more is exchanged at a higher price
An increase in demand creates a shortage at the initial equilibrium price, and the unsatisfied buyers bid up the price. This rise in price causes a larger quantity to be supplied, with the result that at the new equilibrium more is exchanged at a higher price.
What effect does an increase in supply have on the market equilibrium?
Supply curve shift to the right
New equilibrium at a lower price and higher quantity
increase in supply creates a surplus at the initial equilibrium price, and the unsuccessful sellers force the price down. This drop in price increases the quantity demanded, and the new equilibrium is at a lower price and a higher quantity exchanged.
What effect does a decrease in demand have on the market equilibrium?
Demand curve shift to the left
New equilibrium, price and quantity exchanged lower than initially
decrease in demand creates a surplus at the initial equilibrium price, and the unsuccessful sellers bid the price down. As a result, less of the product is supplied and offered for sale. At the new equilibrium, both price and quantity exchanged are lower than they were originally.
What effect does a decrease in supply have on the market equilibrium?
Supply curve shift to the left
New equilibrium at higher price and lower quantity
decrease in supply creates a shortage at the initial equilibrium price that causes the price to be bid up. This rise in price reduces the quantity demanded, and the new equilibrium is at a higher price and a lower quantity exchanged.
What is the difference between relative and absolute price?
→Absolute price: amount of money that must be spent to acquire one unit of a product = money price
→Relative price: amount of money price of one product to the money price of another product, or a ration of two absolute prices
What are the 3 conditions that must be satisfied in order for a market so follow demand-and-supply model?
- There must be a large number of consumers of the product, each one small relative to the size of the market.
- There must be a large number of producers of the product, each one small relative to the size of the market.
- Producers must be selling identical or “homogeneous” versions of the product.
What is disequilibrium price?
Price at which the quantity demanded does not equal quantity supplied - thus, market is in a state of disequilibrium, and market price is changing
