Chapter 3 Flashcards
The demand curve-
- A schedule or graph showing the quantity of a good that buyers wish to buy at each price.
- It is generally downward-sloping with respect to price.
○ As the price of a good or service goes down, the quantity that consumers wish to buy will increase.
○ As the price of a good or service increases, the quantity consumers wish to buy will decrease.
- It is generally downward-sloping with respect to price.
This shows how the price decreases, the quantity increases for the amount of sales.
Why is this?
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 that are substitutes.
Income effect:
- The change in the quantity demanded of a good that results from the effect of a change in the good’s price on consumers’ purchasing power.
- Allowing customers to save more money—> Higher purchasing power: more purchasing.
Buying 5 or 6 things on sale for a total of $400 compared to buying 2 or 3 full price items for a total of $300.
Buyer’s reservation price
- The largest amount of money a buyer would be willing to pay for a unit of a good.
- If the reservation price exceeds the market price, the consumer will purchase the good.
- The higher the cost of an item, the more the company has to play around with the price.
If the price of an item is $20,000 and it increases to $22,000, a consumer would be more willing to pay that in comparison to an item which costs $1 increasing to $4.
The supply curve:
- A curve or schedule that displays the quantity of a goods that sellers wish to sell at each price.
- It is generally upward-sloping with respect to price.
- The seller charges a higher price for additional units in order to cover the higher opportunity costs of each additional unit.
Market equilibrium-
- At the intersection of demand and supply.
- All buyers and sellers are satisfied with their respective quantities at the prevailing market price.
No tendency for the system to change.
- All buyers and sellers are satisfied with their respective quantities at the prevailing market price.
Equilibrium price
Equilibrium price- price at which a good will sell.
Equilibrium quantity
Equilibrium quantity- quantity supplied and quantity demanded are equal.
Excess supply
Excess supply- the amount of which quantity supplied exceeds quantity demanded when the price of a good exceeds the equilibrium price.
Excess demand
Excess demand- the amount of which quantity demanded exceeds quantity supplied when the price of a good lies below the equilibrium price.
Change in quantity demanded
Change in quantity demanded- a movement along the demand curve that occurs in response to a price change.
Change in demand
Change in demand- a shift of the entire demand curve: A demand change at the same price.
Change in the quantity supplied
Change in the quantity supplied- a movement along the supply curve that occurs in the response to a price change.
Change in supply
Change in supply- a shift of the entire supply curve: a supply change at the same price.
Shifts in demand-
These are due to complements:
- Two goods are complements in consumption if an increase/ decrease in the price of one causes a leftward/ rightward shift in the demand curve for the other.
Shifts in demand:
These are due to substitutes:
- Two goods are substitutes in consumption if an increase/decrease in the price of one causes a rightward/ leftward shift in the demand curve for the other.
Shifts in demand-
Income changes:
- Normal good:
Demand shifts rightwards/leftwards when the incomes of buyers increase/ decrease.
Shifts in demand-
Income changes:
- Inferior good
○ Demand shifts leftwards/ rightwards when the incomes of buyers increases/ decreases.
Shifts in supply:
- The supply curve is based on the costs of production.
○ Therefore, anything that affects the costs of production would shift the supply curve in accordance with the shift in price.
○ Other factors such as the number of sellers may affect the supply curve.
Buyers surplus
Buyers surplus- the difference between the buyers reservation price and the price actually paid.
Sellers surplus
Sellers surplus- the difference between the price received by the seller and the lowest price she is willing to sell at.
Total surplus
The sum of buyer’s surplus and the seller’s surplus
When is a market equilibrium efficient:
- When all costs of producing the good or service are borne directly by the seller.
- When all benefits from the good or service accrue directly to buyers.
When is a market equilibrium inefficient:
- When some costs of production fall on people other than those who sell the good or service, the market equilibrium is inefficient.
○ A valued example would include pollution- many factories produce huge emissions of carbon which negatively affects the environment, and leads to the marginal cost being underestimated- which is the cost to society.
Price elasticity of demand-
- A measure of the responsiveness of the quantity demanded of a good or change in the price of that good.
- The percentage change in the quantity demanded that results from a 1 percent change in its price.
Percentage change in quantity demanded / percentage change in price
- The percentage change in the quantity demanded that results from a 1 percent change in its price.
When Price Elasticity of Demand is
(Give the different options with 1).
- > 1 we call it elastic
- =1 we call it unit elastic
- <1 we call it inelastic
Determinants of demand price elasticity:
- Substitution possibilities
- Budget share- if it makes up a tiny portion of your budgeting, this would not change much with a price increase.
- Time- consumers can change their purchasing patterns over time.
