Chapter 2 (Week 1) Flashcards
Demand
“desire” + “willingness to pay”
What determines what consumer’s buy
Tastes
Information - healthy lifestyle
Prices of other goods - check the prices of other brands to see if they are cheaper
Income - buy more luxury items with greater wealth
Government rules and regulations
Quantity demanded
The amount of a good that consumers are willing to buy at a given price
Law of demand
Consumers demand more of a good the lower its price
Substitute
A good or service that may be consumed instead of another good or service - Pepsi instead of Coca Cola
Complement
A good or service that is jointly consumed with another good or service - Strawberries and Cream
Demand function
The relationship between the quantity demanded, price and other factors that influence purchases
Supply
How much producers are willing to produce at a certain price
What determines how much firms want to supply at any given price
Costs of production: as they fall, they are willing to supply more
Government rules and regulations: taxes increasing reduce supply
Technology
Price of inputs
Supply function
Shows the correspondence between the quantity supplied, price, and other factors that influence the number of units offered for sale
Quota
Limit that a government sets on the quantity of a foreign produced good that may be imported
Equilibrium
A situation in which no one wants to change his or her behaviour
Supply equals demand
a price and quantity such that producers supply exactly the quantity which consumers demand
All consumers can buy what they want at the ruling price
All producers can sell what they want at the ruling price
Excess demand
The amount by which the quantity demanded exceeds the quantity supplied at a specific price
Prices will tend to rise
Excess supply
The amount by which the quantity supplied exceeds the quantity demanded at a specific price
Prices will tend to fall
Demand shocks
Changes in consumer income, preferences or prices of related goods
Shift in the demand curve causes a movement along the supply curve
Supply shocks
Changes in production costs, technology, or external events
Shift in the supply curve causes a movement along the demand curve
Licensing laws
Limits the number of firms that may sell goods in a market
Shift supply curves
Policies that cause the quantity demanded to differ from the quantity supplied
Price ceilings: maximum price set below the equilibrium price - create shortages
Price floors: minimum price set above the equilibrium price - create surpluses
Taxes: reduce supply by increasing costs
Subsidies: increase supply by reducing costs
When are the supply and demand models applicable
Perfectly competitive markets
- Everyone is a price taker
- Firms sell identical products
- Everyone has full information about the price and quality of goods
- Costs of trading are low
Monopoly
A market which only has one seller of a good or service
Seller is a price setter and can affect the market price
Oligopoly
A market with only a small number of firms
Seller is a price setter and can affect the market price
Transaction costs
The expenses of finding a trading partner and making a trade for a good or service beyond the price paid for that good or service
