Chapter 2/3: Demand & Supply Flashcards
What is the Individual Demand Curve?
A graph that plots the quantity of an item that an individual plans to purchase at each price
What is another way for describing an individual’s demand curve?
drawing a person’s buying plans given current economic conditions
What does the phrase “holding all else constant” infer?
Rule out the possibility of other factors changing
What does Ceteris Paribus mean?
All other things being unchanged or constant
what does 𝑞 = 𝑓(𝑃) mean?
q = quality, f() = how the price directly influences quantity, p = price
What happens to demand when prices fall lower and lower?
Quantity demands get higher and higher
What is a change in quantity demanded or quantity supplied vs change in demand or supply?
Change in quantity demanded or quantity supplied is a movement along the curve. Change in pure supply or demand means an literal shift in the lines or curves
What does the law of Demand state?
The tendency for quantity demanded to be higher as prices fall
What four principles should you use in order to decide if and how much you want to buy something? What do each of these principles mean?
- Marginal Principle: Break down the question of ”how many litres of gas to buy?”
into a series of smaller marginal choices. - Cost-Benefit Principle: For each marginal choice, buy the additional litre of gas if the
benefits exceed the costs (or price of gasoline). - Opportunity Cost Principle: “Or what?” To accurately assess the marginal benefits
of each litre of gas, always makes a comparison to his next best alternative. - The Rational Rule for the Buyer: Buy more of an item if the marginal benefit of one
more is greater than (or equal to) the price.
T/F demand illustrates the price at which you are willing to buy each quantity?
T
Are demand curves and marginal benefit curves the same?
Yes
What is the Diminishing Marginal Benefit?
Each additional item yields a smaller marginal benefit than the previous item
Is your marginal benefit curve sloping upward or downward according to the diminishing marginal benefit theory?
The curve is downward sloping
What does Market Demand Curve mean?
A graph plotting the total quantity of an item demanded by the entire market, at each price
Individual demand curves are the building blocks of?
the market demand
What does the interdependence principle suggest?
everything is connected
What are the six factors that shift the market demand curve?
- Income
- Preferences
- Prices of related goods
- Expectations
- Congestion and network effects
- The type and number of buyers
Normal Good definition?
A good for which higher income causes an increase in demand
Examples of normal goods?
- Smartphone
- Restaurant meals
- Organic fruits and vegetables
Inferior goods definition?
A good for which higher income causes a decrease in demand
Examples of inferior goods?
- Non-smart phone
- Fast-food meals
- Non-organic fruits and vegetables
Are all goods Inferior or Normal?
Not necessarily
What is an example of a non inferior or normal good?
Generic products like canned foods, cars, etc.
Can changes in your preferences shift your demand curve?
Absolutely
What are some changes in your preference that can shift your demand curve?
-Life-altering event
-Marketing, influencers and fashion cycles
-Social Pressure
-Season/Weather
Definition of complementary good?
Goods that go well together. Your demand for a good will
decrease if the price of a complementary good rises
Examples of complementary goods?
- hot dogs and hot dog buns
- cereal and milk
- iphone & iphone cases
Definition of Substitute Goods?
Goods that replace each other. Your demand for a good will increase if the price of a substitute good rises, and it will fall if the price of a substitute good falls
Examples of Substitute goods?
- If Pizza Hut raises their prices, then my demand for Dominos pizza will increase
- coca cola & pepsi
Can expectations about future prices or future availability influence your
current demand? If so what are some examples?
Yes,
Example 1: If you see gas prices are high right now, you may decide to wait another few days before filling your car with gas.
Example 2: Think back to the early months of the pandemic and the toilet paper shortage. Initially, when you saw toilet paper was available to buy again, you probably bought more rolls than usual. You wanted to stock up while you can!
What does Congestion Effect mean?
When a good becomes less valuable because other people use it. If more people buy such a produce, your demand for it will decrease
What does a network effect mean?
When a good becomes more useful because other people use it. If more people buy such a good, your demand for it will also increase
What is an Individual Supply Curve?
A graph plotting the quantity of an item that a business plans to sell at each price
What are the two things that have to be met in order for a market to be perfectly competitive?
1) all firms in an industry sell
an identical good
2) there are many buyers and sellers, each of whom is small relative to the size of market
Are most Markets perfectly competitive?
Most markets have some degree of imperfection
- Only a few buyers or sellers
- Selling a unique product
- Product has loyal customers
Do marginal costs include Variable Costs or Fixed Costs?
Marginal costs include Variable Costs but exclude Fixed Costs
Variable Costs?
Variable costs like labour and raw material vary with the quantity of output you produce.
Fixed Costs?
costs that don’t vary when you change the quantity of output you produce
Are fixed or variable costs considered sunk costs?
Fixed costs
Market Supply Curve?
A graph plotting the total quantity of an item supplied by the entire market, at each price
What are the five factors that shift the market supply curve
- Input prices
- Productivity and technology
- Prices of related outputs
- Expectations
- The type and number of sellers
What is Productivity Growth?
producing more output with fewer inputs
What does Complements-in-Production mean?
Goods that are made together. Your supply of a good will increase if the price of a complement-in production rises.
What does Substitutes-in-Production mean?
Alternative uses of your resources. Your supply of a good will decrease if the price of a substitute-in-production rises.
