Chapter 3 Flashcards
What is demand?
Demand - How much of something people are willing and able to buy under certain circumstances
What is quantity demand?
Quantity demand - Amount of a particular good that buyers in a market will purchase at a given price during a specified period
Think of yourself as a consumer when dealing with demand
What is Law of demand?
Law of demand - Inverse relationship between price and quantity demanded
What is Ceteris Paribus
Ceteris Paribus - To isolate the effect of a single change in the economy
What is demand schedule?
Think of the price of phones to how many phones have been sold.
If the phone is cheap than the amount of phones sold is high
If the phone is expensive than the amount of phones sold is low
What is Demand Curve?
Represents consumers’ willingness to buy and highest amount they will pay for a given quantity
This curve is a downward sloping curve
What is are Determinates of Demand?
- Consumer preferences
- Prices of related goods
Substitute versus complementary - Incomes
Normal goods
Inferior goods - Expectations
- Number of buyers
The demand for normal goods increases when consumer income rises.
The demand for inferior goods decreases when consumer income rises.
Substitute Goods vs. Complementary Goods
Substitute Goods: Goods we use in place of another (coca cola to pepsi, substitute one over another)
Complementary Goods: Goods that we consume or utilize together (toothpaste with toothbrush or CD player and a CD)
Shifts in the Demand Curve versus Movement along the Demand Curve
A change in one or more of the non-price determinants (income, tastes, etc.) will lead to a change in demand.
This is a shift of the curve.
Increase in Demand = Moves right
Decrease in Demand = Moves left
A change in a good’s own price leads to a change in quantity demanded.
This is a movement along the curve.
Shifts in the Demand Curve
When demand decreases, the demand curve shifts to the left
When demand increases, the demand curve shifts to the right
Movement along the demand Curve
A price increase causes a movement along the demand curve
What is supply?
Supply - how much of a good or service is offered for sale under given circumstances
What is Quantity supplied?
Quantity supplied - amount of good or service offered for sale at a given price during a specified period
Each producer has different price point to decide
viability to supply
What is Law of Supply?
Law of Supply - quantity supplied increases as price increases and vice versa
Decision to produce a good concerns trade-off of
producer benefit from selling and cost to
produce it
Supply Curve
As price increases quantity supply increases
What is a Supply Schedule?
As the price of the phone increases, supply of phone increases
As the price of phone is lower, the supply of the phone is also lower
Think of yourself as the business owner when thinking about Supply
What are Determinants of Supply?
Prices of related goods; Example: Bakery, if price of bread is more attractive than price of cake than the bakery will make more cake
Technology; Example: If you use horses vs tractor, the tractor will be more productive
Prices of inputs (The cost of production); Example: The money we pay to buy ingredients, if it is expensive to buy the things to make a cake than they make less cake, if it is cheaper than it is easier to make more cake
Expectations; Example: If the bakery is expecting that down the road bread will be cheaper than they may sell more currently to make the most bang for their buck
Number of sellers; Example: Subsidies make the production of corn more profitable, so more farmers plant corn; the supply of corn increases
Determinants of Supply Further Explained
A change in one or more of the non-price determinants will lead to a change in supply.
A change in a good’s own price leads to
a change in quantity supplied
What is Market Equilibrium? X Graph Explained
The x axis is amount of phones sold
The y axis is the price of phones
The upper portion of the X Graph represents:
Surplus - quantity supplied is higher than the demand;
Excess quantity supplied; incentive to lower price
The exact middle of the graph (the X) represents:
The market equilibrium point, the quantity supplied equals the quantity demanded.
The lower portion of the X represents:
Shortage or excess quantity demand - demand higher than supplied; incentive is to raise prices
Change in the market equilibrium explained during demand and supply
Demand -
An increase in demand shift the demand curve to the right pushing the equilibrium point up along the supply curve
Red line moves up and to the right along the blue line moving the middle of the graph (equilibrium point with it)
Supply -
An increase in supply shifts the supply curve to the right pushing the equilibrium down along the demand curve
The blue line moves down and to the right along the red line also moving the equilibrium point
Change in the market equilibrium prediction explained
When supply/demand move in thesamedirection, we can predict the direction of the change in quantity but not the direction of the change in price
When supply/demand move inoppositedirections, the change in price is predictable but the change in quantity is not
Both supply and demand increase, buyers and sellers agree that at any given price the quantity they are willing to exchange is higher
