Chapter 3 - Supply and Demand Flashcards
Demand
Amount of some good or service consumers are willing and able to purchase at each price
Quantity demanded
Total units purchased at a set price
A rise in price does what to quantity demanded?
Decreases demand
A fall in price does what to quantity demanded?
Increases demand
Law of demand
Relationship between price and quantity demanded
Demand schedule
Shows quantity demanded at each price
Demand curve
Shows quantity demanded at each price on a graph. Slope down from left to right
Supply
Amount of some good or service a producer is willing to supply at each price
Quantity supplied
Total units sold at a set price
A rise in price does what to quantity supplied?
Increases supply
A fall in price does what to quantity supplied?
Decreases supply
Law of supply
Relationship between price and quantity supplied
Supply schedule
Shows quantity supplied at each price
Supply curve
Shows quantity supplied at each price on a graph. Slopes upward from left to right
Equilibrium price
When both charted on a graph together, where supply and demand curves intersect. Where customers and producers agree.
Surplus
Excess supply, usually above equilibrium price
Shortage
Excess demand, usually below equilibrium price
Ceteris Paribus
“All other things being equal.” A supply or demand curve is only affected by two variables (in a perfect scenario)
6 factors that shift demand curves
- Income
- Changes in preferences
- Aging population
- Changes in expectations of prices
- Substitution price changes
- Complements price changes
Inferior goods
A product whose demand falls when income rises and vice versa
Substitute
Similar goods, that if one has a lower price, the other will not sell as well. Good A sells for $100 so Good B won’t sell for $120
Complements
Different goods, that if one sells, usually so does the other. Good A is peanut butter and Good B is bread
Shift in demand
A change in an economic factor, other than price, causes a different quantity to be demanded at every price
Shift in supply
A change in an economic factor, other than price, causes a different quantity to be supplied at every price
4 factors that shift supply curves
- Conditions for production
- Input pricing
- Technology improvements
- Taxes and regulations
What is the four step process?
- Draw a model of before the economic event took place
- Decide if event changes demand or supply
- Decide whether this change shifts the curve to the left or right
- Identify the new equilibrium and compare to the original
2 kinds of price controls
Price ceiling and price floor
Price floor
Keeps a price from falling below a certain level. It if is set above the equilibrium price, quantity supplied will exceed quantity demanded, and surpluses will result.
Price ceiling
Keeps a price from rising above a certain level. If it is set below the equilibrium price, quantity demanded will exceed quantity supplied, and shortages will result.
Consumer surplus
Amount people would have been willing to pay minus amount they actually paid
Producer surplus
Amount a seller is paid for something minus actual cost of the thing
Social surplus
Consumer surplus plus producer surplus
Deadweight loss
The loss in social surplus that occurs when the economy produces at an inefficient quantity
What is Alfred Marshall’s famous quote?
Asking whether supply or demand determined a price was like arguing “whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper.” Both blades of the demand and supply scissors are always involved
