Chapter 3: Supply and Demand Flashcards
5 factors shifting the demand curve?
Changes in:
- prices of related goods/services (complements in consumption and substitutes in consumption)
- income (normal and inferior)
- tastes
- expectations (of changes in price and income)
- number of consumers
5 factors shifting the supply curve?
- input prices
- prices of related goods/services. Substitutes in production (choice between producing one/good service or another – veterinary selling services for town or countryside) and complements in production (by-product – lamb wool and lamb meat).
- Technology (technology improvements allow for producers to spend less on inputs while maintaining output).
- Expectations (selling now vs storing for later).
- Number of producers
Effects of shift in demand curve?
Price and quantity both increase or both decrease + movement on supply curve.
Effects of shift in supply curve?
Price falls, quantity rise or vice versa + movement on demand curve.
Effects of Supply and Demand shifting in the opposite direction?
Change in price, quantity ambiguous (unless magnitude specified).
Effects of Supply and Demand shifting in the same direction?
Change in quantity, price ambiguous (unless magnitude specified).
Features of perfectly competitive market?
- homogenous product
- no barriers to entry/exit
- perfect information
Nature of equilibrium?
In a market where producers and consumers are informed, equilibrium converges to the same price. In surplus, it will be exhausted by potential producers lowering price. In shortage, it will be exhausted by potential buyers bidding higher.
KEY TERM:
Competitive Market
a market in which there are many buyers and sellers of the same good or service, none of whom can influence the price.
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Supply and Demand Model
a model of how a competitive market behaves.
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Demand/supply schedule
a list or table showing how much of a good or service consumers/suppliers will want to buy/sell at different prices.
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Quantity demanded/supplied
the amount of a good or service consumers/suppliers are willing and able to buy/sell at some specific price.
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Demand/supply curve
a graphical representation of the demand/supply schedule. It shows the relationship between quantity demanded/supplied and price.
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Law of Demand
the principle that a higher price for a good or service, other things equal, leads people to demand a smaller quantity of that good or service.
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Law of Supply
the principle that a higher price for a good or service, other things equal, leads people to supply a larger quantity of that good or service.
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Movement along the Demand/Supply Curve
a change in the quantity demanded/supplied of a good that results from a change in the good’s price.
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Shift of Demand/Supply Curve
a change in the quantity demanded/supplied at any given price, represented graphically by the shift of the original demand/supply curve to a new position, denoted by a new demand/supply curve.
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Individual Demand/Supply Curve
a graphical representation of the relationship between quantity demanded/supplied and price for an individual consumer/producer.
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Market Demand/Supply Curve
the combined quantity demanded/supplied by all consumers given the market price.
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Input
a good or service used to produce another good or service.
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Market-clearing Price
when the quantity of a good or service demanded equals the quantity of that good or service supplied; also referred to as the equilibrium price.
KEY TERM:
Surplus
the excess of a good or service that occurs when the quantity supplied exceeds the quantity demanded; surpluses occur when the price is above the equilibrium price.
KEY TERM:
Shortage
the insufficiency of a good or service that occurs when the quantity demanded exceeds the quantity supplied; shortages occur when the price is below the equilibrium price.
