Chapter 2 Flashcards
Market
consists of buyers and sellers of a good or service
Real Price of a Product
price relative to the prices of other goods and services
Horizontal Interpretation of the demand curve
start with price on the vertical axis and read the corresponding quantity demanded on the horizontal axis
Vertical Interpretation of the demand curve
start with quantity on the horizontal axis and then read the marginal buyer’s reservation price on the vertical axis
Law of Demand
All things being equal, when the price of a product falls, people demand larger quantities of it.
Law of Supply
When the price of a product rises, firms offer more of it for sale
Equilibrium Quantity
quantity demanded of an item at the point of economic equilibrium
Equilibrium Price
quantity supplied of an item at the point of economic equilibrium
Price Ceiling
level above which the price of a good is not permitted by law to rise
Example of price ceiling
rent control
Price Floors
minimum price for a good, established by law, and supported by government’s offer to buy the good at that price
Price Floors
minimum price for a good, established by law, and supported by government’s offer to buy the good at that price
Functions of Price
rationing and allocating
Determinants of Demand
Income Tastes Prices of Substitutes/Complements Expectations Population
Determinants of Supply
Technology Factor Prices Number of Suppliers Expectations Weather
An increase in demand will lead to a
increase in both the equilibrium price and quantity
A decrease in demand will lead to a
decrease in both the equilibrium price and quantity
What does a demand curve show the relationship between?
Between each possible price and the amount of a product that a potential buyer would wish to purchase
When the price of a product is on the y-axis of a graph and the quantity supplied by sellers is on the x-axis, what is most typically true about the slope of a supply curve?
the supply curve is typically upward sloping
Consequences of Rent Control
Deteriorating housing quality
exorbitant fees
misallocation of house resources
The imposition of a price floor causes the aggregate surplus in a market to
decrease
At any price other than the equilibrium price, one side of the market or the other is
dissastisfied
The use of a price support program to increase the price of a good causes consumer surplus to
decrease
Why do supply curves tend to slope upward?
sellers tend to want to sell more of a product at a higher price
