Chapter 2 Flashcards
markets
- interaction between buyers and sellers
- price is discovered in the interactions of buyers and sellers
Markets can be:
-local
-national
- international
Law of demand
- negative or inverse relationship between price and quantity demanded
- other things equal
reasons for law of demand
- law of diminishing marginal utility
- income effect and subsitutionn effect
demand
curve that shows various amounts of a product that consumers are willing to buy at certain prices, during a certain time period
three explanations for law of demand
- common sense (ppl will buy more of a product at a lower cost
- at specific time period people will derive less satisfaction from each unit consumed (diminishing marginal utility
- income and substitution effects (lower price allows for a person to purchase more)
demand curve
- inverse relationship between price and quantity demanded
- quantity demanded on horizontal, price on vertical
- downward slope
determinants of demand
- change in taste
- change in number of buyers
- chnage in income (normal goods, inferior goods)
- change in price of related goods (complements, substitutes)
- chnage in consumers expectations (future prices, future income)
Normal goods vs inferior goods
does not relate to quality
- macoroni is inferior, steak is normal
- value village vs designer
IF INCOME INCREASES, NORMAL GOODS WILL INCREASE
Normal goods vs inferior goods
does not relate to quality
- macoroni is inferior, steak is normal
- value village vs designer
IF INCOME INCREASES, NORMAL GOODS WILL INCREASE
A change in demand will do what to the graph
shift in the entire demand curve
change in quantity demanded will do what to the graph
- movement along the demand curve
Law of supply
- other things equal, as the price rises, the quantity rises
reasons for law of supply
- prace acts as an incentive to producers
- at some point the cost will rise (digging coal, they have to go deeper and deeper, eventually costing more to produce)
determinants of supply
- factor prices
- tech
- taxes and subsidies
- price of other goods
- price expectations
- number of sellers
market equilibrium
- when demand curve and supply curve intersect
- surplus and shortage
- rationing function of prices
- efficient allocation (productive efficiency, allocative efficiency)
Efficient allocation
- production efficiency
- producing goods in the lease costly way
- using best tech
- using the right mix of resources
allocative efficiency
producing the right mix of goods
- combination of goods most highly valued by society
rationing function of prices
- ability of the competitive forces of demand and supply to establish a price at whic selling and buying decisions are consistent
Changes in demand and supply and the effects on price and quanitity
D increases: P increases, Q increases
D decreases: P decreases, Q decreases
changes in demand and supply and effects on price and. quantity
S increases: P decreases, Q increases
S decreases: P increases, Q decreases
complex case: supply increase, demand increase
equilibrium price would decrease, equilibrium quantity is indeterminate
price ceilings
government set pricing
- maximum legal price a seller may charge for a product or service
- set below equilibrium price
-rationing problem
-black markets
- credit card interest ceilings
