Chapter 2 Supply, Demand, And Markets Flashcards
Each additional unit of a good produces less utility than the previous unit
Law of diminishing marginal utility
“All else remaining equal” change one variable at a time
Cetaris Paribus
People only demand a greater quantity of a good if price decreases
Law of demand
Demand
Set of conditions that explain why people do or do not want to buy a product or service
Expectations
Depending on what people expect to happen they may pay either more or less for a good
Substitutes
When goods are substitutes for one another
Consumers will but the cheaper good
Compliments
Goods that are directly related to one another
If price of one good increases it’s compliment will do the same
Law of increasing costs
Extra output of a good can only occur at higher prices because inputs needed are becoming more scarce or that output is occurring at a lower efficiency
Law of supply
Companies will only supply extra units of output if the market price increases
Input goods
Used to make all goods or services
Generally drives the production costs
Can be land labor or capital prices
Related outputs
Two or more goods that use the same inputs for production
Equilibrium
State of natural balance
Surplus
When quantity supplied is greater than the quantity demanded
Shortage
When the quantity demanded is greater than the quantity supplied
Price ceiling
Maximum prices that the government sets for certain products that society perceives to be too expensive
Price floor
When the government sets prices on something that must be accepted as an absolute minimum
Allocative efficiency
The output of each product at which it’s marginal cost and marginal benefit is equal
Prices as rationing tools
The ability to establish a price at which selling and buying decisions are consistent
Dictate where to allocate resources
Prices
What are the determinates of demand
Change in income Change in population Expectations Preferences Substitutes Compliments
What are the determinates of supply
Number of firms Input costs Technology Business environment Related outputs
Effects of a price floor
Decrease quantity demanded
Increase the quantity supplied
Leads to surplus
What are the effects of a price ceiling
Increases quantity demanded
Decreases quantity supplied
Black markets and waiting lists develop
Goals of any market
Allow PRICE to determine output
ALLOCATE the proper amount of resources to the economic activity
If supply or demand curves Shift, ALTER the LAND LABOR CAPITAL devoted to the market
What if a good or service was so vital that we had to GUARANTEE access or output? How would we do this?
Government price controls
Outcomes of a price ceiling
Shortages
Black markets
Waiting lines
Outcomes of a price floor
Surplus
Misallocation of resources
Use of TAX dollars
What is the problem with price ceilings and floors?
In either case, price signals are distorted. This causes INEFFICIENT resource allocation
