Chapter 2 Market Forces: Demand and supply Flashcards
What is the Law of Demand?
The Law of Demand states that as price increases, quantity demanded decreases, and vice versa, assuming all else remains constant.
What factors influence demand besides price?
Factors include:
- price of related goods (substitutes and complements)
- consumer income
- advertising
- population size
- consumer expectations.
What is the difference between normal and inferior goods?
Normal goods see increased demand as income rises (e.g., steak).
Inferior goods see decreased demand as income rises (e.g., bus travel).
How does an increase or decrease in demand affect the demand curve?
An increase in demand shifts the curve right,
while a decrease shifts it left.
What are substitutes and complements?
Substitutes (Think: Either/Or): An increase in the price of one good leads to higher demand for another (e.g., Coke price rises → Pepsi sales increase).
Complements (Think: Go Together): An increase in the price of one good decreases demand for another (e.g., software prices rise → computer sales decline).
How does advertising affect demand?
More advertising shifts demand right (higher demand),
while less advertising shifts it left (lower demand).
What is the demand function and its formula?
+ formula + explain components
The demand function describes how quantity demanded is affected by various factors.
Formula: Qxd = f(P,Pr,M,H),
where Qxd is quantity demanded,
P is price,
Pr is price of related goods,
M is income
H represents other factors.
What is the linear demand function and how is it used?
+ formula + explain components
Used for predicting exact demand levels.
Formula: Qxd = a0 + axPx + ayPy + amM + ahH.
It helps businesses estimate demand levels based on price, income, and other factors.
a values indicate how much each factor affects demand.
Px = Price of product X
Py = Price of another product Y
M = Income
H = Other factors
What is consumer surplus?
Consumer surplus is the extra benefit consumers get when they are willing to pay more than the actual price.
Example: A customer is willing to pay $8 for a bottle of water but only pays $6, gaining $2 in consumer surplus.
What is market supply?
Market supply shows the quantity of a good producers are willing to sell at different prices.
What is the difference between change in quantity supplied and change in supply?
+ key idea
A change in quantity supplied is movement along the supply curve due to price changes
while a change in supply shifts the entire curve due to external factors.
📌 Key Idea:
Higher costs → supply shifts left (decreases).
Lower costs → supply shifts right (increases).
What factors cause a shift in the supply curve?
Factors such as:
1. input prices
2. technology
3. government regulations
4. number of firms
5. taxes can shift the supply curve.
What is the supply function and its formula?
+ formula + explain components
The supply function describes how quantity supplied is affected by various factors.
Formula: Qxs = f(Px,Pr,W,H),
Qxs is quantity supplied
Px is price
Pr is price of related goods
W is input costs
H represents external factors.
What is the linear supply function and how is it used?
+ formula + explain components
The linear supply function predicts quantity supplied mathematically.
Formula: Qxs = β0 + βxPx + βrPr + βwW + βhH.
It helps businesses estimate supply levels based on price, input costs, and other external factors.
β values indicate how much each factor affects supply.
Px = Price of product X
Pr = Price of another product (substitutes in production)
W = Input costs
H = Other factors
What is producer surplus?
Producer surplus is the extra profit businesses earn when selling a product for more than their minimum acceptable price.
Example: Willing to sell for $5 but market price is $8 → $3 in producer surplus.
What is market equilibrium and why is it important?
Market equilibrium is where supply equals demand, meaning no surplus or shortage. It is the natural balance point of the market.
What happens if prices are too low or too high in a market?
If prices are too low, shortages occur because demand exceeds supply. If prices are too high, surpluses occur because supply exceeds demand.
What are price controls and their effects?
Price controls are when the government says:
“You can’t charge more than this,” or
“You can’t charge less than this.”
In other words, the government steps in and sets a limit on prices, instead of letting supply and demand decide.
2 types:
A: Price floors
B: Price ceilings
What is the market demand curve
It is a curve indicating the total quantity of a good all consumers are willing and able to purchase at each possible price.
!! holding the prices of related goods, income, advertising and other variables constant !!
Whats Change in quantity Demanded
When the price of something changes, people change how much they want to buy of it.
That’s it. That’s the basic idea.
When price changes, people buy more or less of the same thing—and that shows up as a move along the same curve on a graph.”
What is Change in Demand
Sometimes people want to buy more or less of something, not because the price changed, but because something else changed—like how much money they have, or what other things cost.
What are price floors
A price floor is when the government sets a minimum price that sellers are not allowed to go below.
Think of it like saying:
“You must charge at least this much for the product or service.”
What are price ceilings
A price ceiling is when the government sets a maximum price that sellers are not allowed to go above.
Think of it like saying:
“This is the highest you’re allowed to charge for this thing—no matter what.”
Full economic price
The full economic price is more than just the money you pay for something.
It includes:
💰 The price you pay + ⏳ The time, effort, inconvenience, or anything else you have to “give up” to get it
Economists care about all the costs, not just what’s on the price tag.
