Chapter 3: Supply, Demand, & Market Price Flashcards
What is PRICE DIRECTED MARKET SYSTEM?
price of a product is determined by supply and demand
What is SUPPLY?
refers to the number of items that sellers are willing and able to purchase at various prices
What is DEMAND?
the quantiles of a product that people are willing and able to purchase at various prices
What are the two functions prices serve?
- rationing effect
- production motivating function
What is RATIONING EFFECT?
the more scarce something is, the higher the price will be and the less people will be able to buy it
What is PRODUCTION MOTIVATING FUNCTION?
prices serve to encourage producers to increase or decrease their level of output
What is INVENTORY?
a stock of goods held by a business yet unsold
What is the LAW OF DEMAND?
states as price increases the quantity of a good that would be purchased decreases and vice versa
What is DESIRE?
wishful thinking
What is the difference between desire and demand?
desire is wishful thinking whereas demand is ready, willing, and able to
What is DEMAND SCHEDULE?
a table showing the quantiles of a product that would be purchased at various prices
When do we (consumers) buy more…?
when the prices are lower
Why does demand behave the way it does?
- more people can afford to buy an item at a lower price
- at a lower price, some people will substitute
- diminishing marginal utility
What is DIMINISHING MARGINAL UTILITY?
last item consumed will be less satisfying than those before
Construct a demand schedule
.25 - 195 .50 - 190 .75 - 175 1.00 - 125 1.25 - 85 1.50 - 65 1.75 - 50 2.00 - 40
What does demand refer to?
consumers
What does supply refer to?
sellers, producers, production
Construct a demand graph
SEE NOTEBOOK price along y - axis (2.00 on top and .25 on bottom closest to 0) amount given along x - axis (0 to 500) line is decreasing (start at 200 and 40) line hits dmu at 200
What is ESCLASTITY OF DEMAND?
- a proportional change in quantity demanded given a proportional change in price
- it describes the degree in which the demand for something would vary at different price levels
Elastic means it its…?
not needed
Inelastic means it is…?
needed
What is REVENUE TEST?
total revenue is equal to the price times the number of units sold
What is another name for REVENUE?
sales
What is another name for SALES?
revenue
What do you do to determine if something is elastic?
run the revenue test
If following a price increase, total revenue should _____ and demand would be ______
if following a price increase, total revenue should fall and demand would be elastic
If total revenue were to increase following a price increase, demand would be _______
if total revenue were to increase following a price increase, demand would be inelastic
If total revenue increased following a price decrease, demand would be ________
if total revenue increased following a price decrease, demand would be elastic
If the price decrease led to a decrease in total revenue, demand would be _________
if the price decrease led to a decrease in total revenue, demand would be inelastic
Why is demand inelastic?
- they are necessities
- difficult to find substitutes
- relativity inexpensive
As prices fall, what do consumers want?
they want products but inly to a certain point
What are two examples that will alter (change) demand and how do they alter it?
- DQ closes in the winter bc their no demand for ice creme when it is cold (decrease)
- A study is released that supports (increase) or does not support (decrease) your product
Construct a change in demand graph
SEE NOTEBOOK
GRAPH IS DECREASING
price is along the y - axis (2.00 - 0 which is at the origin)
quantity is along the x - axis (0 - 300)
original line starts at 2.00 and ends at 200
increase line starts at 2.00 and ends at 300
decrease line starts at 2.00 and ends at 100
*draw arrows inside the lines (original to whichever line needs to be drawn) (arrow head should be pointed at second line drawn)
What is THE LAW OF SUPPLY?
states that sellers will offer more of a product at a higher price and less at a lower price
Construct a supply scheduel
.25 - 40 .50 - 50 .75 - 80 1.00 - 125 1.25 - 175 1.50 - 235 1.75 - 265 2.00 - 300
Construct a supply graph
SEE NOTEBOOK
price along y - axis (2.00 on top and .25 on bottom closest to 0)
amount supplied along x - axis (0 to 300)
line is increasing (start at .25 and 25 then increase until you get to 2.00 and 300)
Changes in supply can be effect by what three things?
- changes in the cost of production
- other profit opportunities
- future expectations
If production goes up, supply ________
will then go down
If production goes down, supply ________
will then go up
Supply decreases when _________
the cost of production increases
Supply rises when _________
the cost of production decreases
What are OTHER PROFIT OPPORTUNITIES?
things that producers could make but don’t unless prices go up then they switch
Explain other profit opportunities…
corn farmers will farm apples if the price of apples rise higher than the price of corn in order to gain more profit
What are FUTURE EXPECTATIONS?
producers anticipate what is going to happen to demand in the future
Construct a change in supply graph
SEE NOTEBOOK
GRAPH IS INCREASING
price is along the y - axis (2.00 - 0 which is at the origin)
supply is along the x - axis (0 - 500)
original line starts at 0 and ends at 300
increase line starts at 0 and ends at 500
decrease line starts at 0 and ends at 200
Make sure to draw dotted line down from either increase or decrease line
What is MARKET PRICE?
- price at which goods and money will actually be exchanged
- price at which supply actually equals demand
When is demand equal to supply?
1.00
Construct an equilibrium graph
SEE NOTEBOOK
GRAPH FORMS A WIERD X
Demand line starts in the top left and goes to the bottom right (decreasing)
Supply line starts in the bottom left and goes to the top right (increasing)
Graphs intersect at 1.00 (draw line down and label equilibrium and 1.00)
What is EQUILIBRIUM?
the point at which things will remain stable as long as the components remain unchanged
When can equilibrium only occur?
in a perfect market
What is a PERFECT MARKET?
a market that operates under the conditions of pure competition
What are the 4 characteristics of a perfect market?
1) buyers and sellers have full knowledge of the prices quoted in the market
2) you have many buyers and sellers so no individual can control prices
3) products are identical with one another, therefore it would make no sense foe buyers to pay more nor for sellers to take less
4) buyers and sellers are free to enter or exit the market
What is EXCESS QUANTITY DEMANDED?
the amount of a product that would be sold at a price higher than the previous market price
Explain EXCESS QUANTITY DEMANDED…
At .50, consumers want 190 but producers only give 50. So, prices need to rise
What is EXCESS QUANTITY SUPPLY?
the difference between the amount that buyers would be willing to purchase at prices above equilibrium and the amount that sellers would put on the market at those prices
Explain EXCESS QUANTITY SUPPLY…
At 2.00, producers want to give consumers 300 but consumers only want 40. So, prices need to fall
What is CLEARING THE MARKET?
going from excess quantity demanded to excess quantity supply
What does an increase in the market price result in?
a decrease in supply
What does an increase in supply result in?
a decrease in the market price
What does a decrease in the market price result in?
an increase in supply
What does a decrease in supply result in?
an increase in the market price
What does an increase in demand result in?
an increase in the market price
What does a decrease in demand result in?
a decrease in the market price
What is another name for equilibrium?
market price
What is another name for market price?
equilibrium
