Chap. 3 - Supply and Demand Flashcards
What is the Law of Demand?
It captures this relationship between price and the quantity demanded of a product. It states that there is an inverse (or negative) relationship between the price of a good and the quantity demanded.
What’s the substitution effect?
That as the price of the good declines, it becomes relatively less expensive compared to the price of other goods and thus the quantity demanded is greater at a lower price.
What’s the Income Effect?
It states that as the price of a good decreases, consumers become relatively richer. Now, their incomes have not increased, but their buying power has increased due to the lower price.
What are the changes or shifters of demand?
Tastes and Preferences, Income, Substitutes and Compliments, Future Expectations, and Number of Buyers
What is a substitute? Give and example
Something that takes the place of the good. Instead of buying apples you could buy oranges.
What is a compliment? Give an example
Goods that are consumed together. Hamburgers and Buns.
What is a normal good? Give an example
The demand for the good increases as income rises. Cars or boats.
What is an inferior good? Give an example
As income rises the demand for the good falls, but as income falls the demand for the good rises. Mac and cheese.
What does supply show?
Supply shows the amount that producers are willing and able to supply to the market at each given price. Producers must receive a price that covers the marginal cost of production. As the price of the good rises, producers are willing to produce more of the good even though there is an increasing marginal cost.
What are the changes or shifters of supply?
Resource Prices, Technology, Prices of other goods, Taxes and Subsidies, Future Expectations, Number of Sellers, and Supply Shocks
If the price of crude oil increases what happens with the supply of gasoline?
The supply of gasoline will shift left since crude oil is a resource used in the production of gasoline.
What are substitutes in production? Give an example
Goods that produce similar resources. If the price of wheat increases relative to the price of other crops that could be grown on the same land, such as potatoes or corn, then producers will want to grow more wheat, ceteris paribus. By increasing the resources devoted to growing wheat, the supply of other crops will decline.
What are complements in production? Give an example
Goods that are jointly produced. Beef cows provide not only steaks but also leather that is used to make belts and shoes. An increase in the price of steaks will cause an increase in the quantity supplied of steaks and will also cause an increase (or shift right) in the supply of leather.
What is a supply shock?
Natural disasters such as earthquakes, hurricanes, and floods impact both the production and distribution of goods.
What is a price floor and who does it benefit?
A minimum price for which the good may be sold. Price floors are designed to benefit the producers providing them a price greater than the original market equilibrium. To be effective, a price floor would need to be above the market equilibrium. This causes a surplus.
