Chapter 3 Flashcards
What four things make a perfectly competitive market
Many buyers and sellers
Identical goods
Free entry and exit
Price takers
Market demand
The demand by all consumers of a given good or service
Quantity demanded
The amount of a good or service that consumers are willing and able to purchase at a given price
Law of demand
There is an inversely proportional relationship between the price of a good or service and the quantity demanded.
Substitution effect
The change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power
Income effect
The change in quantity demanded of a good that results from the effect of a change in the good’s price on a consumers’ purchasing power, holding all other factors constant.
Determinants of demand
Income Price of related good Tastes Population/demographics Natural disasters/pandemics Consumer expectation
Demand: Income
Normal goods: when income increases, demand for that good increases. I.e. Clothes
Inferior goods: When income increases, demand for that good decreases: I.e. No-name products
Demand: Price of related goods
Substitutes: Goods and services that can be used in place of another good to satisfy similar needs or desires. An increase in the price of a substitute decreases the quantity demanded of the substitute and increases the demand for that product.
Complements: Goods and services that are used together. A decrease in the price of a complement increases the quantity demanded of the complement and the demand for that product
Demand: Tastes
If consumer tastes change, they may buy more or less of the product
Demand: Demographics
Demographics: The characteristics of a population with respect to age, race and gender. Increases in the number of people buying something will increase the amount demanded.
Demand: Disasters and Pandemics
Occurrence of a natural disaster or pandemic: Consumers buy less of of most goods but more of few goods.
Demand: Consumer expectations
Consumers decide which products to buy and also when to buy them (Future products are substitutes for current products)
an expected increase in the price tomorrow increases demand today
An expected decrease in the price tomorrow decreases demand today
Market supply
The sum of all individual supplies of a good or service
Quantity supplied
The amount of a good or service that firms are willing and able to supply at a given price
Law of supply
The price of a product and quantity supplied have a directly proportional relationship
Determinants of supply
Price of inputs Technological change Price of related goods in production Number of firms in the market Producer expectations Natural disasters and pandemics
Supply: Prices of Inputs
Inputs are anything used in the production of a good or service.
An increase in the price of an input decreases the profitability of selling the good, causing a decrease in supply.
An decrease in the price of an input increases the profitability of selling the good, causing an increase in supply.
Supply: Technological change
A firm may experience a change in its ability to produce a given level of output with a given quantity of inputs
Supply: Prices of related goods
Substitutes in production: Goods that can be produced using the same resources
Complements in production: Goods that are produced together
Supply: Number of fims
More firms: Supply increase
Fewer firms: Supply decreases
Supply:Producer expectations
If a firm anticipates that the price of its product will be higher in the future, it might decrease its supply today in order to increase it in the future.
Supply: Disasters and pandemics
Less of a good will be supplied due to disruptions in production.
Market equilibrium:
A situation in which quantity demanded = quantity supplied
Prediction when there is a surplus of product
Sellers were compete amongst themselves, thus driving the price down
Prediction for shortage of goods
Sellers will realize they can increase the price and still sell as many pairs of shoes, so the price will rise.
Effect of shifts in demand and supply on equilibrium
An event that shifts the demand curve, supply curve or both curves will result in a new equilibrium
