chapter 2 (CASA): the basic of supply and demand Flashcards
what does the supply curve demonstrate?
The relationship between the quantity of a good that producers are willing to sell and the price of the good
all other supply-determining factors (e.g., wages, interest charges, raw material costs, etc.) remain constant
QS = QS(P)
how is the shape of supply curve? why?
The Supply Curve slopes upward
at higher prices, more firms are able and willing to increase output
what happens to the supply curve when there is lower production costs? what does this ultimately mean?
the entire supply curve shifts to the right
there is greater quantity supplied at the same price, or same quantity supplied at a lower price
what happens to the supply curve when there is higher production costs? what does this ultimately mean?
the entire supply curve shifts to the left
there is lower quantity supplied at the same price, or same quantity supplied at a higher price
what determines change in Quantity supplied?
price changes (movement along the supply curve)
Changes in supply determining factors (shift of the supply curve)
what does the demand curve demonstrate?
The relationship between the quantity of a good that consumers are willing to buy and the price of the good
holding other demand-determining factors (e.g., incomes, tastes, weather, prices of substitute and complementary goods, etc.) constant
QD = QD(P)
what is the shape of the demand curve? what does this mean?
The Demand Curve slopes downward
it demonstrates that less consumers are able and willing to buy at a higher price
what would happen to the demand curve if consumer income increase? what does this mean?
the entire demand curve shifts to the right
it means greater quantity demanded at the same price, or same quantity demanded at a higher price
what would happen to the demand curve if consumer income decrease? what does this mean?
the entire demand curve shifts to the left
it means lower quantity demanded at the same price, or same quantity demanded at a lower price
what determines change in Quantity demanded?
Price change (movement along the demand curve)
Changes in demand-determining factors (shift of the demand curve)
what is the equilibrium price?
QD = QS
market-clearing price
what is the goal of a free market?
to reach the equilibrium price
in a graph, where do the graphs to demonstrate equilibrium?
wherever the supply and demand curves intersect
how do we know there is a market surplus?
Market price > equilibrium
QS > QD
how does a free market react after realizing the is a market surplus?
Downward pressure on price,
P1 falls to P0
QD increases and QS decreases
Market adjusts to equilibrium
how do we know there is a market shortage?
Market price < equilibrium
QD > QS
how does a free market react after realizing the is a market shortage?
Upward pressure on price,
P1 rises to P0
QD decreases and QS increases
Market adjusts to equilibrium
what determines the market clearing price in a free market?
S and D interact to determine the market-clearing price
what happens when there is no equilibrium?
the market will adjust to alleviate a shortage or
surplus and return the market to equilibrium
how does a market need to be so that the free market mechanism remain effective?
Markets must be competitive
what influences the shifts in market equilibrium?
the shifts in the supply and demand curves
When S and D change simultaneously, the impact on the equilibrium price and quantity is determined by?
The relative size and direction of the change
The shape of the supply and demand models
price elasticity of demand?
Measures the percentage change in the quantity demanded of a good resulting from a one-percent change in price
measures basically how a change in price can influence qui quantity demanded
what is the formula for price elasticity of demand?
E PD = (%∆QD)/(%∆P) = (∆QD/QD)/(∆P/P) = (P/QD) *(∆QD/∆P) < 0
when is a good price elastic?
|E PD| > 1
it means that a little change of price will significantly change the quantity demanded
when is a good price elastic?
|E PD| < 1
it means that a little change of price will insignificantly change the quantity demanded
what does the price elasticity of a good depend on?
depends on the availability of substitute goods
EPD depends on the slope and the values of P and Q
where must the price elasticity of a good be measured? why?
EPD must be measured at a particular point on the demand curve because EPD
changes along the demand curve
on a demand curve, where is the good price elastic?
where is it inelastic?
The top portion of QD is elastic
The bottom portion of QD is inelastic
what are the extreme case of elasticity of demand?
Completely inelastic demand
Infinitely elastic demand
what are the other demand elasticities excluding price elasticity of demand?
Income Elasticity of Demand
Cross-Price Elasticity of Demand
Income Elasticity of Demand
measures the percentage change in the quantity demanded of a good resulting from a one-percent change in income
basically, if a change of income greatly influences the quantity demanded of a good
Cross-Price Elasticity of Demand
measures the percentage change in quantity demanded of good A resulting from a one-percent change in the price of good B
basically, if a price change of a substitute or complement greatly influences the quantity demanded of a good
what is the formula for the Income Elasticity of Demand?
E ID = (∆QD/QD) / (∆I/I) = (I/QD) * (∆QD/∆I)
what is the formula for the Cross-Price Elasticity of Demand?
E QaPb = (∆Qa/Qa) / (∆Pb/Pb) = (Pb/Qa) * (∆Qa/∆Pb)
when you consider the Cross-Price Elasticity of Demand, when is the result a complementary good? why?
when the resulting elasticity is negative
because an increase in the price of B leads to a decrease in the quantity demanded for A
a decrease in the price of B leads to a increase in the quantity demanded for A
when you consider the Cross-Price Elasticity of Demand, when is the result a substitute good? why?
when the resulting elasticity is positive
as the price of one good rises, the demand for the substitute good increases
as the price of one good decreases, the demand for the substitute good decreases
price elasticity of supply
Measures the quantity supplied of a good resulting from a one-percent change
in price
basically, if a price change significantly influences the quantity supplied
what is the formula for price elasticity of supply
same as the one for demand
Point elasticity of demand
EPD at a particular point on the demand curve
Arc elasticity of demand
EPD calculated over a range of prices
When to use arc elasticity of demand?
used when there is not a general function for the relationship of two variables, but two points on the relationship are known
When to use point elasticity of demand?
requires detailed knowledge of the functional relationship and can be calculated wherever the function is defined
what correlations can you make between the elasticity formula and the linear formulas for supply and demand?
The slope of QD = ∆Qd/∆P = -b
The slope of QS = ∆Qs/∆P = d
ED = –b(P/Q)
ES = d(P/Q)
P* being equilibrium price
Q* being equilibrium quantity
how can elasticity if income come into play in the the demand formula?
Qd = a -bP + fI
f being elasticity of income
if demand falls by 20%, what happens to demand curve?
the entirety of the demand curve shifts to the left by 20%
if the astronauts formula was QD = 13.5 – 8P, now it will be Q’D = 10.8 – 6.4P
we only consider 80%
are markets usually free of government intervention?
nah boy
how can government intervene?
– Imposed taxes and granted subsidies
– Price controls
what do price controls do?
usually hold the price above or below the equilibrium price
can create excess demand or excess supply
