chapter 4 Flashcards
what is demand
buyers willingness and ability to purchase a certain good or service
what is the law of demand
(other things equal), quantity demanded falls when price of good rises, visa versa, inverse relationship, only applies to one product at a time
what is the law of supply
(other things equal) quantity supplied of good rises when price of the good rises, direct relationship
surplus versus shortage
surplus: quantity exceeds demand
shortage: quantity demanded is greater than supplied
what is a market
group of buyers and sellers and its institution or arrangement by which they trade
what is perfect competition
many buyers and sellers, sellers and buyers are price takers
what is a monopoly
one seller, buyers are price takers
what is a price taker
individual or company that must accept the prices in a market due to a lack of influence on the market price
what is a demand schedule
table, shows the relationship between price of good and quanitity demanded
what is a demand curve
graph that shows the relationship between price of good and quantity demanded
what is a normal good
increase in income leads to an increase in demand
what is an inferior good
an increase in income leads to a decrease in demand
what is a substitute
increase in the price of one good increases the demand of the other
what is a complement
increase in the price of one leads to a decrease in the demand for the other
income
normal good: increase in income leads to increase in demand, shifts D to the right
inferior good: increase in income leads to decrease in demand, shifts D to the left
price of related goods
substitutes if increase in price of one leads to the increase in the demand for the other
complements if fall in price of one raises the demand for another good
*represented by movement along the curve
tastes (trends)
anything which causes a shift in taste toward a good will increase demand, shift the D curve to the right
expectations about the future
expected increase in income leads to increase in current demand
expected higher prices leads to increase in current demand
number of buyers
increase, market demand increases, shifts curve
advertisements / announcements
increase the demand, shift curve
supply schedule
table showing relationship between price of good and quantity supplied
supply curve
shows relationship between price of good and quantity supplied, change is represented by movements along supply curve
variables that can shift the supply curve
input prices, technology, expectations, number of sellers
input prices
supply negatively related to prices of inputs, fall makes production more profitable at each output price, firm supply larger quantity at each price, S curve shifts right
technology
determines how many inputs are required to produce a unit of output
cost-saving shifts S to right
number of sellers
increase in seller’s increases quantity, shifts curve right
(increase supply = right, decrease in supply =left)
expectations about the future
sellers may adjust supply according to expectations of the future
equilibrium
intersection of supply and demand curve
external shock
e.g. extreme drought, changes equilibrium quantity and shifts curve
how to analyze changes in equilibirum
- decide whether event shifts supply, demand, or both curves
- decide shift left or right
use diagram to see of how sift affects price and quantity
