Chapter 2 Flashcards
What are the different ways in which supply-demand analysis can be applied?
Understanding and predicting how changing world economic conditions affect market price and production
Evaluating the impact of government price controls, minimum wages, price supports, and production incentives
Determining how taxes, subsidies, and import quotas affect consumers and producers
What is the supply curve?
The supply curve represents the relationship between the quantity of a good that produces are willing to sell and the price of the good
What kind of slope does the supply curve have?
It has an upward slope
In which direction does the supply curve shift if the cost of production decreases?
It shifts to the right
What are some factors that affect supply?
Production costs, including wages, interest charges, and the costs of raw materials.
What does the phrase “change in supply” refer to?
It refers to a shift in the supply curve
What does the phrase “change in the quantity supplied” refer to?
It refers to a movement along the supply curve
What is the demand curve?
It represents the relationship between the quantity of a good that consumers are willing to buy and the price of the good
What would cause a shift to the right of the demand curve?
An increase in consumer’s income
What are substitutes?
Two goods for which an increase in the price of one leads to an increase in the quantity demanded of the other.
What are complements?
Two goods for which an increase in the price of one leads to a decrease in the quantity demanded of the other.
What occurs when the price of a good exceeds that of the equilibrium price?
There is a surplus ad the price falls
What occurs when the price is below that of the equilibrium price?
There is a shortage and so the price increases
What is the equilibrium price?
It is the price that equates the quantity supplied to the quantity demanded
What is a surplus?
It is when the quantity supplied exceeds the quantity demanded
When can we use the supply-demand model?
We can use it when the market is roughly competitive, meaning that both sellers and buyers have a little market power
What is the market mechanism?
It is the tendency in a free market for price to change until the market clears
What is a shortage?
It is when the quantity demanded exceeds the quantity supplied
What happens to the equilibrium price when the supply curve shifts to the right?
The price decreases
What is elasticity?
It is the percentage change in one variable resulting from a 1 percent increase in another
What happens to the equilibrium price when the demand curve shifts to the right?
The price increases
What happens to the equilibrium price when both the supply and demand curve shift to the right?
The price increases
What will the price elasticity of demand always be?
It will always be negative
What is the price elasticity of demand?
It is the percentage change in quantity demanded of a good resulting from a 1 percent increase in its price
Does the elasticity of demand vary? When?
It varies along the demand curve as it is different as quantity and price change
What kind of curve does an infinitely elastic demand curve have?
It is a straight horizontal line
What is infinitely elastic demand?
It is a principle that consumers will buy as much of the good as they can get at a single price, but for any higher price the demand drops to zero
What kind of curve does a completely inelastic demand curve have?
It has a vertical demand curve
What is completely inelastic demand?
It is the principle that consumers will buy a fixed quantity of a good regardless of its price
What is income elasticity of demand?
It is the percentage change in the quantity demanded resulting rom a 1 percent increase in income
What is cross-price elasticity of demand?
It is the percentage change in the quantity demanded of one good resulting from a 1 percent increase in the price of another
What is the price elasticity of supply?
It is the percentage change in quantity supplied resulting from a 1 percent increase in price
What is point elasticity of demand?
It is the price elasticity of a particular point on the demand curve
What is the arc elasticity of demand?
It is the price elasticity calculated over a range of prices
What will occur without the presence of price controls?
The market will clear at the equilibrium price and quantity
