Chapter 3: Demand, Supply and Price Flashcards
What is the difference between quantity demanded and quantity bought/exchanged?
Q demanded refers to desired quantity
Q bought refers to actual purchases
What are some factors which can influence demand?
A product's price Consumer's income Prices of other products Tastes Population Expectations about the future
What does “ceteris paribus” mean?
Hold all other variables constant
A basic hypothesis is that - Ceteris Paribus - the price of a product and the quantity demanded are ________ correlated
Negatively
How will changes in variables OTHER THAN PRICE afect the demand curve?
They will shift the demand curve to a new position
Leftwards - increase in demand
Rightwards - decrease in demand
What is the difference between a change in demand and a change in quantity demanded?
Change in demand: shift of entire curve
Change in Q demanded: Movement from one point to any other point (could be on same curve or a new one)
How does demand change when income rises for a normal good? For an inferior good?
Normal good: demand increases with income
Inferior good: demand decreases with income
People will buy Grey Goose instead of Smirnoff if they get a raise
What are complementary goods?
Goods that are consumed together, eg Milk and Cereal
What are substitute goods?
Goods consumed en lieu of each other, eg coffee and tea
What is quantity supplied?
The amount of a product that firms DESIRE to sell in some time period
Not necessarily the same as quantity actually sold
A basic hypothesis is that - Ceteris Paribus - the price of a product and the quantity supplied are ________ correlated
Positively
Producers are interested in making profits. If a product is more expensive, selling it is more profitable for them
A change in what variable is necessary to shift the entire curve of supply?
Any variable besides price
What is the difference between a change in supply and a change in quantity supplied?
Change in supply: shift of entire curve
Change in Q supplied: Movement from one point to any other point (could be on same curve or a new one)
What happens to the Supply and Demand curves of a product if its substitute good increases in price?
Demand: shifts right (more demand)
Supply: Shifts left (less supplied)
What happens to the Supply and Demand curves of a product if its complement good increases in price?
Demand: shifts left (less demand)
Supply: Shifts right (more supplied)
How can we define a market?
Any situation in which buyers and sellers negotiate the transaction of some goods or services
Markets can differ in the degree of competition
In a perfectly competitive market, buyers and sellers are price takers
What happens at equilibrium price?
Every buyer finds a seller and every seller finds a buyer - the market “clears”
ABOVE this price, there is an excess supply
BELOW this price, there is an excess demand
What happens above the equilibrium price?
Q supplied exceeds Q demanded, “downwards” pressure on prices
What happens below the equilibrium price?
Q demanded exceeds Q supplied, “upwards” pressure on prices
If Quantity Demanded is defined as Q = a -bP
and Q supplied is defined as Q = c + dP
How do you calculate equilibrium price?
What about equilibrium quantity?
Substitute equations and solve for P
P = (a-c)/(b-d)
Plug back into either equation for Q:
Q = (ad + bc)/(b+d)
An increase in demand causes a(n) ______ in both equilibrium price and quantity, whereas a decrease in demand causes a(n) ________ in equilibrium price and quantity
Increase
Decrease
An increase in supply causes a(n) ______ in both the equilibrium price and quantity, whereas a decrease in demand causes a(n) _______ in equilibrium price and quantity
Decrease
Increase
If the demand function for good X is defined as Q = 400 - 0.25 P(x) + 0.01 P(z) - 0.001Y Where P(x) is the price of good X P(z) is the price of good Z and Y is the average income,
What type of good is X? What is the relation of X and Z
X is an inferior good, substitute to Z
What is the difference between absolute and relative price?
Absolute price: The amount of money that must be spent to acquire one unit of that product
Relative price: The price of one good in terms of another
Demand and supply curves are drawn in terms of relative prices
