chapter 2 Flashcards
A market is
a group of buyers and sellers of a particular good or service.
A competitive market is a market with the following characteristics:
- There are many buyers and sellers.
- Individual buyers and sellers are price-takers. The market determines the price.
- There is freedom of entry and exit to and from the market.
- The goods offered for sale are all the same (homogeneous products).
- Buyers and sellers act independently and out of self-interest.
The quantity demanded of a good.
is the amount that buyers are willing and
able to purchase at a particular price
The individual demand is
the quantity demanded by one individual or organisation.
The market demand is
the sum of the quantities demanded by all buyers.
The law of demand:.
The quantity demanded of a good falls when the price of the good rises.
A demand schedule shows
the relationship between the price of a good and the quantity demanded.
The demand curve is
a graph of the relationship between the price of a good and the quantity demanded, all other factors being equal.
A change in the price results
in a movement along the demand curve.
Income effect:
A fall in the price means that consumers can buy more of the good given their income
Subsitution effect:
A fall in the price causes consumers to subsitute other goods with the now cheaper good.
market demand is
the sum of all the individual demands for a particular good or service.
Substitutes:
Two goods (A and B) for which an increase in the price of one good leads to an increase in the demand for the other.
Complements:
Two goods (A and C) for which an increase in the price of one good leads to a decrease in the demand for the other
Normal good:
a good for which an increase in income leads to an increase in demand
Inferior good:
a good for which an increase in income leads to a decrease in demand
Giffen goods (A special case of inferior goods)
• A good that is so strongly inferior that an increase in its price results in an
increase in the quantity demanded (violation of the law of demand)
The quantity supplied of a good or service reflects
the willingness to sell. It is the amount that sellers are willing and able to sell at a particular price.
The individual supply is
the quantity supplied by one firm.
The market supply is
the sum of the quantities supplied by all firms.
The law of supply:
The quantity supplied of a good rises when the price of a good rises.
A supply schedule shows
the relationship between the price of a good and the quantity supplied.
supply curve shows
how much producers offer at any given price, holding constant all other factors that may influence producer’s decisions about how much to sell
market supply is
the sum of the supply of all sellers.
When the price of one or more inputs rises (labor, energy, raw materials,…),
the costs of production increase.
An equilibrium is
a situation in which the price has reached the level where quantity supplied equals quantity demanded
(Qsi = Qdi).
The equilibrium price P∗
is the price where the quantity demanded is the
same as the quantity supplied.
The equilibrium quantity Q∗
is the quantity bought and sold at the
equilibrium price
The law of supply and demand
• In perfectly competitive markets, the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance.
A shortage is
a situation in which the quantity demanded is greater than the quantity supplied at the going market price. The willingness to pay is greater than the market price.
A surplus is
a situation in which the quantity supplied is greater than the quantity demanded at the going market price.
Comparative statics is
the comparison of economic outcomes before and after some economic variable is changed.
Diminishing marginal benefits:
as you consume more of a good, your willingness to pay for an additional unit declines.
