Chapter 3 - Demand, supply and price Flashcards
What is quantity demanded
Total amount that consumers desire to purchase at a certain price IN SOME TIME PERIOD
Quantity bought differs from quantity demanded because it refers to _______
actual purchases
flow variable + ex
so much per unit of time (ex. income, expenditure, etc.)
stock variable + ex
meaning in a point in time (ex. money in bank account, etc.)
Qt demanded flow or stock
flow
Hypothesis about qt demanded and why
Price and qt demanded are negatively related. Reduction of price means desire can be satisfied more cheaply by buying more of it
How price changes demand curve
Doesn’t change it -> only move on it
How variables other than price change demand curve (2 possibilities)
increase in demand (moves rightward)
decrease in demand (moves leftward)
4 things that can cause shift of demand curve
1) average household income
2) prices of other products
3) distribution of income or population
4) expectations about the future
Why average household income influences demand curve
normal good and inferior goods
normal good
qt demanded increases when income rises
inferior good
qt demanded decreases when income rises
Why distribution of income influences demand curve
changes for particular groups
Why prices of other products influence demand curve
Substitutes and complements
Substitutes def (in demand POV)
Good that can replace another one to satisfy a need
Complements def (in demand POV)
Goods that need to be consumed together
Why distribution of population influences demand curve
number of consumers
Why expectations about the future influence demand curve
push us to buy more or before a change
change in demand vs in qt demanded
in demand = curve shift
in qt demanded = mvmt along the curve or along a new curve
qt supplied def
amount of product firms desire to sell IN SOME TIME PERIOD
qt supplied vs actually sold
supplied = firm desires to sell
actually sold = sold
qt supplied flow or stock
flow
Hypothesis about relationship between price and qt supplied and why
higher price = higher qt supplied –> want to maximize profits
change in supply vs in qt supplied
in supply = curve shift
in qt supplied = along the curve or along a new curve
change in price effect on supply curve
stays the same. mvmt along it or new one
change in variable other than price on supply curve
shift of the supply curve
which variable changes will shift supply curve (5 ex.)
1) price of inputs
2) technology
3) Gvt taxes and subsidies
4) Prices of other products
5) number of suppliers
2 possibles shift of supply curve
Rightward -> increase
Leftward -> decrease
why price of inputs influences supply curve
affects profits
why technology influences supply curve
can produce more (because production is more efficient)
why Gvt taxes and subsidies influences supply curve
affects profits
why Prices of other products influences supply curve
substitutes and complements
Substitutes def (in supply POV)
Products that can be produced with the same resources. (Producers will produce the product with highest price (ex. potatoes) so influences supply of carrots for ex.)
Complements def (in supply POV)
Products that are produced together (Producers will produce more of one (ex. oil) if its price goes up so associated product (ex. gas produced along) will have higher supply
why number of suppliers influences supply curve
entering suppliers : increase in supply
exiting suppliers : decrease in supply
Market def.
Any situation where buyers and sellers negotiate transaction of outputs
How markets may differ
In degree of competition among various buyers and sellers
Perfectly competitive market def
Buyers and sellers are price takers. Price won’t change because of one person
When can we apply demand-and-supply model to describe price determination
Three conditions :
1) Large number of consumers
2) Large number of producers
(each one small relative to size of market)
3) Producers sell homogeneous versions of the product
what is equilibrium price (2)
- price where every buyer finds seller and vice versa -> market clears
- point that the market tends to reach if no regulation
If we force exchange at price above equilibrium
excess supply -> market does not clear
If we force exchange at price below equilibrium
excess demand -> market shortage (qt missing)
Four laws of supply and demand briefly
What happens equilibrium price and qt in these 4 situations
- fix supply. right or left shift of demand
- fix demand. right or left shift of supply
How to put demand and supply into graph (2)
1) equations
2) tables
Absolute price of product def
Amount of money spent to get one unit
Relative price of product def
Price of one good in terms of another
absolute price vs relative price : which one doesn’t change with inflation
relative price
demand and supply curves drawn in terms of relative prices or absolute prices ?
relative prices
assumption when studying a relative price
prices of products other than the one we study are constant
