Chapter 3 Flashcards
The supply curve
Upward sloping
Opportunity costs affects
The demand curve
Downward sloping
Different affects
The equilibrium point
- where the most people are the most happy
- supply and demand C crosses each other
- straight line equation to identify
- price and quantity
Straight line equation
Y = kx + m —> P = a + bQ
Excess supply
Price flaw - the lowest price for to sell the product
The supply is higher, lower demand
Excess demand
Price Ceiling - the highest price to sell the product
The demand is higher, lower supply
Adjustment of excess supply
Markets are self-adjusting
Let the market set the price for the product
Demand and supply shifts
Endogenous and exogenous
Endogenous
A change in the quantity demanded = we mean the change in quantity that people wish to buy that occurs. In response to a change in price
- Q changed because P changed
Four simple rules
- An increase in demand will lead to an increase in both the equilibrium price and quantity
○ Move curve to the right - A decrease in demand will lead to a decrease in both the equilibrium price and quantity
○ Move curve to the left - An increase in supply will led to a decrease in the equilibrium price and an increase in the equilibrium quantity
○ Move curve to the right - A decrease in supply will lead to an increase in the equilibrium price and a decrease in the equilibrium quantity
Move curve to the left
Exogenous
If we talk about a change in demand we mean that people want to buy more of a certain item, even fi the price stays unchanged -
- Q changed, either upwards or downwards, but P does not change
Cost-benefit P Demand curve
benefit = buyers reservation price
cost = actual amount the buyer must pay
Demand C - vertical interpretation
Change the axis for price and quantity
Supply curve - Low hanging fruit principle
If we expand the production, we turn first to those whose opportunity cost of producing the product is lowest, and only then to others with a higher opportunity cost
Supply - Horizontal interpretation
Begin with a price and go over to the supply curve to read the quantity that sellers wish to sell at that price on their horizontal axis.
Supply- Vertical interpretation
Begin with a quantity and then go up to the supply curve to read the corresponding marginal cost on the vertical axis.
Sellers reservation price
the smallest dollar amount for which she would not be worse off if she sold an additional unit
When is a system in equilibrium?
when all forces at work within the system are canceled by others, resulting in a balanced or unchanging situation.
When is a market in equilibrium?
when no participant in the market has any reason to alter his or her behavior, so that there is no tendency for production or prices in that market to change
Cash on the table principle
Means a transaction can not take place unless the buyer’s reservation price for the good exceeds the seller’s reservation price - When these meet both parts get economic surplus
