Chapter 3: Demand & Supply Flashcards
what are the 2 sides of a market?
buyers & sellers
Competitive Market
has many buyers & sellers so no single buyer or seller can influence the price
changes in response to demand & supply
Producers offer items for sale if the price is _____ enough to cover opportunity cost. How do consumers respond to this change?
- High
- seek cheaper alternative to expensive items
What is money price?
amount of dollars that must be given up in exchange for an object
If a cup of coffee cost $1 & gum cost 50 cents, what is the opportunity cost of 1 cup of coffee? How does relative price relate?
- 2 packs of gum
- Relative Price - ratio of one price to another (is an opportunity cost)
- Tells us opportunity cost of the good in terms of how much of the basket we must give up to buy it
What is demand?
entire relationship between the price of a good & the quantity demanded of that good
what is quantity demanded?
amount consumers plan to buy during a given time period at a particular price
T/F: quantity demanded often exceeds the amount of goods available
T: quantity bought is less than the quantity demanded
How is quantity demanded measured?
as an amount per unit of time
E.g. 1 cup of coffee per day, 7 cups per week, 365 cups per year
Law of demand
other things remaining the same, the higher the price of a good, the smaller is the quantity demanded; the lower the price of a good, the greater is the quantity demanded
How does higher price reduce the quantity demanded? Explain the 2 main effects.
Substitution effect - when the price of a good rises, relative price & opportunity cost rises
- Goods have substitutes that can be used in its place
(e.g. energy bars or energy drinks)
- As opportunity cost rises, incentive to economize on
its use & switch to substitute becomes stronger
Income Effect - price rises relative to income
§ Higher price + unchanged income = people cannot afford to buy goods they previously bought
§ Decrease quantities demand of some goods & services
Give an example of substitution & income effect
energy bar = $3, eventually doubles to $6
§ Fewer bars sold, more people switching to cheaper energy drink (substitute)
§ Tighter budget, people buy fewer energy bars
What does the demand curve depict?
relationship between the quantity demanded of a good & its price when all other influences on consumers planned purchases remain the same
What does the demand schedule depict?
lists quantities demanded at each price
What is marginal benefit in relation to demand?
willingness & ability to pay
○ As quantity increases, marginal benefit for each additional unit decreases
What is a change in demand?
- Any factor that influences buying plans changes, other than the price of the good
As demand increases, the curve shifts _____ & quantity demanded at each price _____
- rightwards
- increases
List 6 factors that bring change in demand
- price of related goods
- Expected future price
- income
- expected future income & credit
- populaton
6.preferences
Substitute vs. Complement
§ Substitute - good used in place of another good (e.g. hamburger instead of hotdog)
§ If price of substitute for a good rises, people buy
less of the substitute
□ E.g. hotdog prices rise, people buy more burgers
(demand increases)
§ Complement - good used in conjunction w/ another good
□ E.g. energy bars & exercise
□ E.g. if gym prices fall, people buy more
memberships & more bars
normal vs inferior good
§ Normal good - demand increases as income increases § Inferior good - demand decreases as income increases
Explain how expected future prices effects changes in demand
§ EFP rises (& good can be stored), the OPC (opportunity cost) of obtaining good for future us is LOWER TODAY than in the FUTURE when price is expected to be HIGHER
§ Demand of good increases, today
§ E.g. Wheat drought; expect price of pasta to increase, therefore buy enough pasta for next few months
Supply
entire relationship between the price of a good & quantity supplied of it
Quantity supplied
point on supply curve that describes the quantity supplied at a particular price
Not same as quantity sold - quantity supplied often greater than the quantity demanded
Measured as an amount per unit of time
Law of supply
the higher the price of a good, the greater the quantity supplied; the lower the price of a good, the smaller the quantity supplied
why does higher price increase quantity supplied?
§ Marginal cost increases - as quantity produced increases, marginal cost increases
§ Higher price minimizes cost of production
What is the minimum supply price?
shows the lowest price at which someone is willing to sell
○ Lowest price = marginal cost
○ Small quantity produced, lowest price someone willing to sell one more unit is low
○ As quantity produced increases, marginal cost of each additional unit rise along w/ supply curve
6 factors than influence change in supply
- Prices of Factors of Production
§ Price of factor of production increases, lowest price that produced is willing to accept for the good increases, supply decreases
□ E.g. Price of jet fuel increases, supply of air travel decreases - Prices of Related Goods Produced
§ E.g. price of energy drink increases, firm switches production from cola drinks to energy drinks - cola drinks decreases supply
□ Both drinks are substitutes in production - can be produced using same resources
§ E.g. Beef price rises, supply of cowhide increases
□ Both are complements in production - produced together - Expected Future Prices
§ Return from selling good in future increase & is higher than it is today - Number of Suppliers
§ # of firms that produce good increases, supply of the good increases - Technology
§ New method discovered that lowers the cost of producing a good - State of nature
§ Natural forces that influence production
□ E.g. good weather increases supply of agricultural products
Price of a good falls, quantity supplied _____ & mvmt occurs ___ supply curve
- decreases
2.down
Price of a good rises, quantity supplied _____ & mvmt occurs ____ the cupply curve
- increases
- up
if supply increases, curve shifts____
right
If supply decreases, curve shifts____
left
Market Equilibrium
Occurs when the price balances buying plans & selling plans
Equilibrium price vs equilibrium quantity
- Equilibrium price - quantity demanded = quantity supplied
- Equilibrium quantity - amount bought & sold at equilibrium price
Market moves towards it equilibrium because:
- Price regulates buying & selling plans
- Price adjust when plans don’t match
If price is too high _________.
If price is too low __________.
- Price too high, quantity supplied exceeds quantity demanded
- Price too low, quantity demanded exceeds quantity supplied
When does a shortage vs a surplus occur?
- Price below equilibrium - shortage
- Price above equilibrium - surplus
Shortages force prices ___. Why?
- UP
○ Markets operate to increase price of good & move it towards equilibrium price
○ Noticing unsatisfied consumers, producers raise the price
○ Producers increase their output
○ As producers push price up, price rises towards equilibrium
Rising price reduces shortage - decreases quantity demanded & increases quantity supplied
As supply increases, price ____ & quantity ____.
As supply decreases, price _____ & quantity ____.
- falls
- increases
- falls
- decreases
What happens when the equilibrium quantity of demand & supply changes in the same direction?
If Demand increase by more than supply increase, price rises
if Supply increases more than demand increases, price falls
§ Shortage nor surplus arises
§ Bigger increase in demand would create shortage
& rise in price
§ Bigger increase in supply would create surplus &
fall in price
