Chapter 3: Demand, Supply, and Market Equilibrium Flashcards
What does the demand curve tell us?
The different amounts of a product that consumers are willing and able to purchase at different possible prices holding other factors constant (BASICALLY THE RELATIONSHIP BETWEEN QUANTITY DEMANDED AND PRICE)
What is a consumers’ willingness to consume determined?
preferences which can be affected by advertising, consumption trends, and seasonality
What determines ability to consume?
Economic factors like income, price of good, prices of related goods
Reservation price
Maximum price that a comsumer is willing to pay for the good at different quantity levels (MB)
The law of demand
demand curve is downward sloping, suggesting an inverse relationship between price of the good and quantity demanded
according to the law of demand as price falls….
quantity demanded rises
according to the law of demand as price rises….
quantity demanded decreases
What does a change in quantity demanded mean?
There is a change in the price of the good itself and involves an upward or downward movement along a given demand curve
What does a change in demand mean?
There is a change in one or more of the demand shifters currently being held constant and involves an outward or inward shift of the demand schedule
Substitution effect
As one things becomes more expensive, a consumer may switch to another related product
Income effect
As the price of something increases, the consumer’s purchasing power is reduced lowering the amount they can afford
6 demand shifters
consumer income prices of substitute goods prices of complementary goods tastes and preferences number of consumers in the market expected future price of the good in question
Normal Goods
Demand increases or decreases directly with the income change
Inferior goods
Demand increases or decreases inversely with income
What determines a substitute?
An increases in price of a good will cause an increase in demand for the other . A decrease in the price of one wil cause a decrease in demand for the other
What determines a complement?
An increase in price of one will cause a decrease in the demand for the other and a decrease in the price of one will cause an increase in demand for the other
Tastes and Preferences
a favorable change in consumer preferences for a product means more of it will be demanded at each price, shifting demand curve to the right
Number of buyers
An increase in the number of buyers in a market increases product demand, shifting the demand curve to the right
Expected prices
A newly formed expectation of a higher price in the future may cause consumers to buy now in order to “stock up” thus shifting the current demand to the right
What the supply curve?
Gives the relationship between quantity supplied and price of the good in question
Marginal cost and the supply curve
Tells us the minimum prices that a producer must receive to be incentivized to supply a unit of the good at different quantity levels (producers reservation price
Law of supply
Curve is upward sloping,, suggesting that there is a direct relationship between price of the good and quantity supplied
According to LOS, as the price falls….
quantity supplied falls
According to LOS, as the price rises….
quantity supplied rises
Why does the supply curve slope upward?
The opportunity cost of production increases as more of the good is produced
7 Supply Shifters
Resource or input prices Alternative output prices Expected Prices of the good in question Technology Taxes and subsidies The number of producers in the market Weather, labor strikes, etc
Rationing function of prices
The ability of the competitive forces of supply and demand to establish a price at which selling and buying decisions are consistent
Price Ceiling
Sets the maximum legal price a seller may charge for a product
What happens when the price ceiling is set below equilibrium price
Said to be binding, causing a shortage
What happens when price ceiling is above the equilibrium price?
Said to be non-binding….no effect on the market
How to distribute a product that has persistent shortage
Ration coupons
Black Markets
Ration coupons
authorize coupon bearers to purchase a fixed amount of gas per month
Black markets
gas is illegally bought and sold at prices above the legal limits
Price Floor
Minimum legal price set by the government
What happens when a price floor is above equilibrium price?
said to be binding, it will cause a surplus
How to cope with product surplus?
Supply control
Demand Expansion
Government purchase
