Chapter 3: Where Prices comes form: the Interaction of Supply and Demand Flashcards
Demand Schedule
A table that shows relationships between the price of a product and the quantity of the product demanded
Quantity Demanded
The amount of goods and services that a consumer is willing and able to purchase at a given price
Demand Curve
A curve that shows the relationship between the price of a product and the quantity of the product demanded
Market Demand
The demand by all the consumers of a given good or service
Law of Demand
When holding everything else constant, when the price of a product falls the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease
Substitution Effect
The change in the quantity demanded of a good that results from a change in price making that good or less expensive relative to other goods, holding the effect of the price change on consumers’ purchasing power
Income Effect
The change in the quantity demanded of a good the results from the effect of a change in the good’s price on consumers’ purchasing power
Ceteris Paribus Condition
Means all else equal
- requirement for analyzing two variable relationships
Variables that shift the market demands
- Income
- Prices of related goods
- Tastes
- Population and demographics
- Expectations
Normal Good
When demand increases following a rise in income and decreases following a fall in income
Inferior Good
When demand decreases following a rise in income and increases following a fall in income
Substitutes
Goods and services that can be used for the same purpose
How does a increase in the price of a substitute effect the demand curve
Shift right
- Consumers buy less of the substitute and more of this good
How does an increase in the price of a complementary good effect the demand curve
Left shift
- Consumers buy less of the complementary good and less of this good too
How does an increase in the taste for the good effect the demand curve
Right shift
- Consumers are willing to buy a large quantity of the good at every price
How does an increase in the population effect the demand curve
- Shift right
- Additional consumers result in a greater demand at every price
How does an increase in the expected future price of the good effect the demand curve
- Shift right
- Consumers buy more of the good today to avoid the higher future price
Change in demand
Shift of the demand curve, change in one of the varibles
Change in quantity demand
Movement along the demand curve as a result of change in the product’s price
Quantity Supplied
The amount of a good or service that a firm is willing and able to supply at a given price
Supply Schedule
A table that shows the relationship between the price of a product and the quantity of the product supplied
Supply Curve
The relationship between the price of a product and the quantity of the product supplied
Law of supply
Holding everything else constant, increases in price causes increases in the quantity supplied and decreases in price result in decrease in the quantity supplied
Variables effecting market supply curve
- Price of inputs
- Technological change
- Prices of substitutes in production
- Number of firms in the market
- Expected future prices
Technological change
A positive or negative change in the ability of a firm to produce a given level of output from a given quantity of inputs
How does an increase in the price of an input effect the supply curve
Left shift
- The cost of producing the good rises
How does an increase in the productivity effect the supply curve
Right shift
- The cost of producing the good falls
How does an increase in the price of a substitute in production effect the supply curve
Left shift
- More of the substitute is produced, and less of the good is produced
How does an increase in the number of firms in the market effect the supply curve
Right shift
- Additional firms result in a greater quantity supplied at every price
How does an increase in the expected future price of the product effect the supply curve
Left Shift
- Less of the good will be offered for sale today as firms wait to take advantage of the higher price expected in the future
Change in supply
A shift in the supply curve, occurs when there is a change in one of the varibles
Change in quantity supplied
a movement along the supply curve as a result of a change in the products price
Market Equilibrium
When the quantity demanded equals the quantity supplied
Competitive market equilibrium
A market equilibrium with many buyers and many sellers
Surplus
A situation in which the quantity supplied is greater than the quantity demanded
Shortage
When the quantity supplied is less than the quantity demanded
How does a right shift in the supply curve change price and quantity
Q increases
P decreases
How does a left shift in the supply curve change price and quantity
Q decreases
P increases
How does a right shift in the demand curve change price and quantity
Q increases
P Increases
How does a left shift in the demand curve change price and quantity
Q Decreases
P Decreases
How does a right shift in the supply and demand curve change price and quantity
Q increases
P increases or decreases
How does a left shift in the supply and demand curve change price and quantity
Q decreases
P increases or decreases
How does a right shift in the supply curve and a left shift in the demand curve change price and quantity
Q increases or decreases
P decreases
How does a left shift in the supply curve and a right shift in the demand curve change price and quantity
Q increases or decreases
P increases
