Chapter 3 Flashcards
What is quantity demanded?
It is the total amount that consumers desire to purchase in some time period
What does quantity bought refer to?
It refers to actual purchases
Is quantity demanded a flow or a stock?
It is a flow
How are the price of a product and the quantity demanded related?
They are negatively related
Why are the quantity demanded and the price of a product negatively related?
Because there are usually several products that can satisfy any given want or desire
What does the reduction in the price of a product mean?
It means that the specific desire that can be satisfied by the product can now be satisfied more cheaply by buying more of that product
Where is price on a graph?
On the y axis
When does demand change?
When income increases (shifts to the right)
What variables other than price shift the demand curve to a new position?
Consumer’s income (shift right if income increases)
Price of other goods (direction depends on whether the good compliments or substitutes the other)
Consumer’s preferences
Population (more consumers = larger quantity bought)
Significant changes in weather (weather can influence satisfaction)
What does a rightward/upward shift in the demand curve indicate?
An increase in demand
What does a leftward/downward shift in the demand curve indicate?
A decrease in demand
What is a change in demand?
It is a change in quantity demanded at every price (a shift in the entire curve)
What is a change in quantity demanded?
It is a movement from one point on a demand curve to another point (movement along the demand curve)
What is the trick to know what a shift or movement means along a demand curve?
Change in price means change in quantity demanded (movement from one point on a demand curve to another point) and change in anything else means change in demands (shift of the entire curve)
What is quantity supplied?
The amount of a product that firms desire to sell in some time period
Quantity supplied is the amount that firms are willing to offer for sale and not necessarily the quantity actually sold
Is quantity supplied a flow or a stock?
It is a flow
How are the price of the product and the quantity supplied related?
They are positively related
Why are the price of the product and the quantity supplied positively related?
Because producers are interested in making a profit
What happens when the price of a particular product rises?
The production and sale of the product becomes more profitable
Why is the supply curve positive?
The more products produced the higher the cost per unit of production (marginal cost)
What variables other than price will shift the supply curve to a new position?
Price of inputs (more expensive inputs = decrease in supply so the curve will shift left)
Technology (curve shift right)
Significant changes in weather (bad weather conditions lead to lower production)
Number of suppliers (shift the curve right as increased production = increased supply)
What is a change in supply?
It is a change in quantity supplied at every price - a shift of the entire curve
What does a change in quantity supplied refer to?
It refers to a movement from one point on a supply curve to another point - a movement along the supply curve
What is the concept of a market
A market can be defined as any situation in which buyers and sellers negotiate the transaction of some goods and services
How can markets differ?
They can differ in the degree of competition among various buyers and sellers
What are buyers and sellers in a perfectly competitive market?
They are price takers
What is the equilibrium price equation?
Quantity demanded = Quantity supplied
What happens to any price that is above the equilibrium price?
There is excess supply and thus downward pressure on price
What happens to any price below the equilibrium price?
There is excess demand and thus upward pressure on the price
When does the market clear?
At equilibrium
What are the 4 possible curve shifts in the market equilibrium graph?
An increase in demand causes an increase in both the equilibrium price and equilibrium quantity (up and right along the supply curve)
A decrease in demand causes a decrease in both equilibrium price and equilibrium quantity (down and left on supply curve)
An increase in supply causes an decrease in the equilibrium price and increase in equilibrium quantity (down and right along the demand curve)
A decrease in supply causes an increase in equilibrium price and a decrease in the equilibrium quantity (up and left on demand curve)
What is the absolute price of a product?
It is the amount of money that must be spend to acquire one unit of that product
What is the relative price?
It is the price of one good in terms of another
How are demand and supply curves drawn?
They are drawn in terms of relative prices rather than absolute prices
What are the three conditions that must be met for price determination in a market to be well described by the demand-and-supply model?
- Large number of consumers; each one small relative to the size of the market (opposite of this situation: one consumer which is a monopsony)
- Large number of producers; each one small relative to the size of the market (opposite of this situation: one producer which is a monopoly)
- Producers must be selling ‘homogeneous’ versions of the product
