Chapter 2 - The Basics of Supply and Demand Flashcards
what are some characteristics of the supply curve?
The supply curve is upward sloping: The higher the price, the more firms are able and willing to produce and sell.
If production costs fall, firms can produce the same quantity at a lower price or a larger quantity at the same price. The supply curve then shifts to the right.
Factors that affect supply?
The quantity that producers are willing to sell depends not only on the price they receive but also on their production costs, including wages, interest charges, and the costs of raw materials.
When production costs decrease, output increases no matter what the market price happens to be. The entire supply curve thus shifts to the right.
differentiate between a movement along the supply curve and shifts of the supply curve.
Economists often use the phrase change in supply to refer to shifts in the supply curve, while reserving the phrase change in the quantity supplied to apply to movements along the supply curve.
What is a supply Curve?
Relationship between the quantity of a good that producers are willing to sell and the price of the good.
What is a demand Curve?
Relationship between the quantity of a good that consumers are willing to buy and the price of the good.
What are some characteristics of the demand curve?
The demand curve is downward sloping; holding other things equal, consumers will want to purchase more of a good as its price goes down.
Factors that affect demand?
The quantity demanded may also depend on other variables, such as income, the weather, and the prices of other goods. For most products, the quantity demanded increases when income rises.
A higher income level shifts the demand curve to the right.
What are substitutes?
Two goods for which an increase in the price of one leads to an increase in the quantity demanded of the other.
What are complements?
Two goods for which an increase in the price of one leads to a decrease in the quantity demanded of the other.
What is equilibrium (or market clearing) price.
Price that equates the quantity supplied to the quantity demanded.
Explain market mechanism.
This is tendency in a free market for price to change until the market clears.
What is market surplus?
A situation in which the quantity supplied exceeds the quantity demanded.
What is a market shortage?
A Situation in which the quantity demanded exceeds the quantity supplied.
When can we use the supply-demand model?
We are assuming that at any given price, a given quantity will be produced and
sold.
This assumption makes sense only if a market is at least roughly competitive. By this, we mean that both sellers and buyers should have little market power—i.e., little ability individually to affect the market price.
Suppose instead that supply was controlled by a single producer—a monopolist. If the demand curve shifts in a particular way, it may be in the monopolist’s interest to keep the quantity fixed but change the price, or to keep the price fixed and change the quantity.
What is elasticity?
Percentage change in one variable resulting from a 1-percent
increase in another.
