Chapter 2: Concepts/ Theory Flashcards
Quantity Demanded+ Formula
amount of a good or service consumers are willing to purchase during a given period of time
Q= f(P,M,Pr,T,Pe,N)
Normal good
an increase in income results in more of the good purchased
Inferior good
an increase in income results in less of the good purchased
Substitute good
an increase in price results in demand rising for the other good
Complement good
an increase in price results in demand falling for the other good
Slope parameters
parameters in a linear function that measure the effect on the dependent variable (Qd) of changing the independent variables (P,M,Pr,T,Pe,N)
Variable P’s relation to Q and sign of slope parameters
Inverse
Negative
Variable M’s relation to Q and sign of slope parameters
For normal goods: Direct, positive
For inferior goods: Inverse, negative
Variable Pr’s relation to Q and sign of slope parameters
For substitute goods: Direct, positive
For complement goods: Inverse, negative
Variable T’s relation to Q and sign of slope parameters
Direct
Positive
Variable Pe’s relation to Q and sign of slope parameters
Direct
Positive
Variable N’s relation to Q and sign of slope parameters
Direct
Positive
Direct demand function+ Formula
visualizations that show how quantity demanded relates to product price, holding all other factors constant
Qd= f(P)
Inverse demand function+ Formula
when price is expressed as a function of quantity demanded
P= f(Qd)
Law of demand
quantity demanded increases as price falls, and quantity demanded decreases as price rises
Change in quantity demanded vs. Change in demand
Qd: change in P (price), movement along the demand curve
D: change in M, Pr, T, Pe, or N (anything other than price), shifting demand curve
Quantity supplied+ Formula
amount of a good or service offered for sale during a given period of time
Qs= f(P,Pi,Pr,t,Pe,F)
Subsitutes in production
an increase in the price of one good causes producers to increase the production of that good and decrease production of the other
Complements in production
an increase in the price of one good causes producers to increase the production of both goods
What is Pi? (Qs)
price of inputs
What is t? (Qs)
technology
What it T? (Qd)
time
What is F? (Qs)
number of firms in the industry
What is Pe?
price expectations
What is Pr?
price of a related good
What is N? (Qd)
number of consumers in the market
What is M? (Qd)
income
Direct supply function+ Formula
quantity supplied expressed by changes in price
Qs= f(P)
Change in quantity supplied vs. Change in supply
Qs: movement along the supply curve caused by a change in price
S: shifting the supply curve as a result in changes in Pi, Pr, t, Pe, or F
Inverse supply function
price as expressed as a function of quantity supplied
P= f(Qs)
Supply price
minimum price necessary to induce producers to offer a given quantity for sale
Market equilibrium
quantity supplied and demanded where consumers can take all they want and producers can supply all they want
Qd= Qs
Surplus
when Qs exceeds Qd
Shortage
when Qd exceeds Qs
Economic value
maximum price a buyer is willing to pay for a unit
Consumer surplus
difference between economic value and market price, net gain of the consumer
Producer surplus
difference between market price and supply price, net gain of the producer
Social surplus
sum of producer and consumer surplus, the area below the demand curve and above the supply curve on a graph
What happens when D increases and S stays constant?
equilibrium price and quantity both rise
What happens when D decreases and S stays constant?
equilibrium price and quantity both fall
What happens when S increases and D stays constant?
equilibrium price falls and quantity rises
What happens when S decreases and D stays constant?
equilibrium price rises and quantity falls
Indeterminate
unpredictable changes in equilibrium price and quantity when both D and S shift at the same time
Price ceiling+ what it causes
maximum price the government permits sellers to charge for a good or service, can cause shortages
Price floor+ what it causes
minimum price the government permits sellers to charge for a good or service, can cause surpluses
