Chapter 2 Flashcards
Price Takers
Individual buyers and sellers because their contributions are very small, and the decisions made by them have no effect on the market-determined price.
Market
Any arrangement that brings together buyers and sellers.
Market demand curve
horizontal summation of individual consumers’ demand curves
law of demand
the quantity demanded of a good or service is inversely related to its price, ceteris paribus
income effect
as a product’s price declines, a buyer’s real purchasing power increases.
substitution effect
when there is no real change in real purchasing power, an increase in price of good will cause buyers to unambiguously shift their purchases into a relatively less expensive substitutes
Opportunity costs
the substitution effect reflects changes in a consumer’s opportunity costs from the price change
normal goods
increase in consumers’ money income will increase demand for most goods and services. likewise, a decrease in money income results in far-fewer purchases and a left-shift of the demand curve
inferior goods
the demand for this type of good varies inversely with consumers’ money income; economic expansion = demand shift to the left while bankruptcy = demand shift to the right; i.e. demand for auto repairs and used cars during a recession
informative advertising
provides prospective consumers with information about new or existing products
persuasive advertising
attempts to boost sales by creating an image that may have little or nothing to do with the product’s physical characteristics; it appeals to consumers’ emotions; increase in ad-inspired purchases = right shift while negative opinion = left shift
substitutes in consumption
an increase in the price of y will cause some consumers to shift their purchases into relatively less expensive good x
complements in consumption
if they are consumed together, i.e. tennis rackets and tennis balls
Consumer Surplus
value that buyers received from the purchase of a good or service in excess of the amount paid.
Law of Supply
the quantity supplied of good or service is directly related to a change in its market price, ceteris paribus
Substitutes in production
involve trade-offs in the production of two or more goods or services using the same production facilities, such as the choice of producing halogen light bulbs or compact fluorescent light (CFL) bulbs on the same assembly line.
Complements in production
Involve the joint production of two or more goods with the same production facilities.
Producer Surplus
Analytical supply counterpart to consumer surplus is producer surplus, which is the difference between total revenues received from the sale of a good or service and the minimum needed to produce it.
Operating profit
difference between the firm’s total revenue and expenses related to a firm’s total revenue and expenses relating to a firm’s ongoing operations (total variable cost).
Market equilibrium
Price where the quantity demanded equals the quantity supplied; Prices below equilibrium price = shortage,
Net Social welfare
Sum of consumer surplus and producer surpluses
Market structure
The greater the sum of consumer and producer surplus
Rationing function of prices
Process by which changes in market-determined prices eliminate shortages and surpluses is referred to as rationing function of prices.
Price ceiling
maximum legal price that a firm can charge for its product
queuing
non-price rationing mechanism must be used to allocate products that are in short supply
price floor
minimum legal price that a supplier can expect for its product
Allocating function of prices
demand for productive resources is derived from the demand for final goods and services, producers use price information to reallocate inputs from lower to higher valued uses
