Chapter 3 Flashcards
What is quantity demanded?
The amount that the household/consumer wants to purchase given the price of the good.
e.g. how many cans of coke do you want to buy given the price of the can of coke?
What is the law of demand?
There is an inverse relationship between price and quantity demanded.
So when price goes down, quantity demanded increases.
Why is the demand curve downward sloping?
It’s the reason for the law of demand which is:
- the substitution effect
- the income effect
- the Law of diminishing marginal utility
What is the Substitution effect? (reason for law of demand)
Changes in price motivate consumers to buy relatively cheaper substitutes goods.
E.g. if price of milk increases the quantity demanded decreases because people are going to find substitute products to milk
What is the Income effect? (reason for law of demand)
Changes in price affect the purchasing power of consumers’ income.
E.g. when the price of milk goes down, the purchasing power increases as people are able to buy more. Or, if the price for milk goes up, people are going to stop buying more milk because the PP decreased.
What is the Law of Diminishing Marginal Utility? (reason for law of demand)
marginal = additional utility = satisfaction
As you continue to consume a given product, you will eventually get less additional utility (satisfaction) from each unit you consume.
E.g. if you are hungry an apple offers pretty high value. But, the more you consume, the less hungry you get making each additional apple less valuable.
A change in price moves _____ the demand curve.
along
If something else other than price changes it will ____ the demand curve. (either right or left)
shift.
due to increase or decrease in demand.
e.g. milk causes baldness so curve will shift to the left as demand will decrease.
What are the 5 shifters of demand?
causes the demand curve to shift
- Tastes/Preferences
- Number of Consumers
- Price of related goods (substitutes and compliments)
- Income
- Expectations
How would tastes/preferences cause the demand curve to shift?
E.g. if study came out and said milk makes kids smarter if they drink it every morning, the demand would increase so the demand curve would shift to the right
How would number of consumers cause the demand curve to shift?
E.g. more customers coming to town would increase the demand for milk
How would price of related goods cause the demand curve to shift?
E.g. almond milk and regular milk are substitutes for each other, cereal compliments milk. So, if price goes down for regular milk, demand would increase for almond milk. If price goes up for cereal, the demand for milk will decrease so will shift curve to the left.
How would income cause the demand curve to shift?
Depends on the type of product. There’s either normal goods or inferior goods.
Normal goods = income and the demand for the product are directly related. demand increases when income increases. you demand more of it because your income increased.
Inferior goods = Income and the demand for the product are inversely related.
How would expectations cause the demand curve to shift?
If you think price of milk will increase next week you are going to buy a lot of milk now. If you think milk will decrease you are going to wait to buy more then.
When there is a change in demand the price _______
Why is there a change in demand?
stays the same
Because of the 5 shifters
What happens to the demand for a product when the price decreases?
Demand stays the same, but the quantity demanded increases.
What changes the quantity demanded?
the Price. (moves along the curve)
What changes the demand?
the 5 shifters. (moves the entire curve)
What is the Law of supply?
There is a direct relationship between price and quantity supplied
E.g. when the price for milk increases, the quantity producers make will increase.
A supply curve is ______ sloping
upward.
when the price increases, the quantity supplied increases
When there is a change in price, it moves _____ the supply curve
along
What are the 5 shifters of supply?
- Price of resources
- Number of producers
- Technology
- Tax and Subsidies
- Expectations
How would price of resources cause the supply curve to shift?
If there was an increase in the price of dairy cows the supply of milk would decrease causing a shift to the left.
How would the number of producers cause the supply curve to shift?
If there was an increase in the number of dairy farmers, the supply of milk would increase causing a shift to the right.
How would technology of producers cause the supply curve to shift?
New advanced milking machines would cause the supply for milk to increase causing a shift to the right.
How would tax and subsidies cause the supply curve to shift?
A subsidy is when the government wants firms to produce more so they give them money to produce more output. This would increase the supply, causing the curve to shift to the right.
A tax would take away producers’ money and since they don’t have money to produce stuff, the supply would decrease and the curve would shift to the left.
How would expectations cause the supply curve to shift?
If a producer thinks they can make more profit on their products a few weeks from now, they’ll hold back supply now and supply later on.
What happens to the supply for a product when the price increases?
Supply stays the same, but the quantity supplied increases.
What changes the quantity supplied?
Price.
moves along the curve
What changes the supply?
The 5 shifters
moves the entire curve
When does equilibrium happen?
When the quantity demanded = the quantity supplied
What is a surplus?
When the quantity supplied is greater than the quantity demanded.
What is a shortage?
When the quantity demanded is greater than the quantity supplied.
What is quantity supplied?
The amount of goods or service the producer wants to sell given the own price of the actual good.
What happens if the quantity supplied is greater than the quantity demanded?
Inventories rise, signal to seller to drop price
What happens if the quantity supplied is less than the quantity demanded?
Inventories fall, signal to seller to raise price
For D and S analysis it is the ______ price that matters
relative
What is relative price?
The ratio of the money price of one product to the money price of another product; that is, a ratio of two absolute prices.
