chapter 4 Flashcards
How do markets work
Markets use the forces of supply and demand to set prices and allocate resources.
Example: In a competitive market for smartphones, prices adjust based on supply constraints and consumer demand.
What is price mechanism
Prices signal information and incentives to both buyers and sellers.
What is the role of supply and demand
Supply and demand determine market equilibrium.
Example: If demand for coffee increases, the price will rise, leading to a higher quantity of coffee supplied.
What is market equilibrium
The point where supply equals demand.
What is the law of demand
As prices fall, the quantity demanded rises.
Example: When the price of a new video game drops from $60 to $40, more consumers decide to buy it.
What is the demand schedule
A table showing the quantity demanded at different prices.
Example: An increase in consumer income can shift the demand curve for luxury cars to the right.
What are the factors affecting demand
Income changes, preferences, expectations, and prices of related goods.
what is the law of supply
As prices rise, the quantity supplied increases.
Example: If the price of wheat increases, farmers will grow more wheat.
What is the supply schedule
A table showing the quantity supplied at different prices.
What are the shifts in the supply curve
Non-price factors can shift the supply curve.
Example: A technological advancement in farming can shift the supply curve for crops to the right.
What are the factors affecting supply
Input prices, technology, expectations, and the number of suppliers.
What is equilibrium
Equilibrium is where quantity demanded equals quantity supplied.
Example: If the price of coffee is $5, and at this price, 100 cups are demanded and supplied, the market is in equilibrium.
Explain surplus and shortage
Surpluses occur when supply exceeds demand, and shortages occur when demand exceeds supply.
What is the impact of disequilibrium
Disequilibrium leads to changes in price until equilibrium is restored.
Example: If coffee is priced at $6, a surplus will develop, and the price will eventually fall back to equilibrium.
Explain price adjustments
Prices adjust to balance supply and demand.
explain movements along curves
Price changes cause movements along the demand and supply curves.
Example: A drop in coffee prices from $5 to $4 causes a movement along the demand curve, increasing the quantity demanded.
Change in Quantity vs. Change in Demand/Supply:
Price changes affect quantity demanded/supplied, while non-price changes shift the entire curve.
explain shifts of curves
Non-price factors shift the demand and supply curves.
Example: An increase in the price of coffee beans shifts the supply curve leftward, decreasing the quantity of coffee supplied.
explain demand vs supply shifts
Factors like consumer preferences and production costs cause shifts.
add more about the above
what are external shocks
External events can affect supply and demand.
Example: A natural disaster reducing coffee bean supply causes a supply curve shift leftward, increasing prices.
what are shocks
Unpredictable events that disrupt market equilibrium.
Explain policy interventions
Government policies influence supply and demand outcomes.
Example: A subsidy for coffee production can increase supply and lower prices for consumers.
What are some types of policies
Taxes, subsidies, price controls.
provide histocial events that demonstrate market adjsutments
The oil price shocks of the 1970s showed how supply disruptions led to higher prices and economic adjustments.
What are the modern market dynamics
Contemporary issues affect market outcomes.
Example: The rise of e-commerce has shifted supply and demand in the retail market.
Technological Advancements: Innovations that reshape markets and consumer behavior.
market
a group of buyers and sellers of a particular good or service
competitive market
a market in which there are many buyers and many sellers so that each has a negligible impact on the market price
quantity demanded
the amount of a good that buyers are willing and able to purchase
law of demand
the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises
demand schedule
a table that shows the relationship between the price of a good and the quantity demanded
demand curve
a graph of the relationship between the price of a good and the quantity demanded
normal good
a good for which, other things equal, an increase in income leads to an increase in demand
inferior good
a food for which, other things equal, an increase in income leads to a decrease in demand
substitutes
two goods for which an increase in the price of one leads to an increase in demand for the other
Compliments
two goods for which an increase in the price of one leads to a decrease in the demand for the other
Quantity supplied
the amoutn of a good that sellers are willing and able to sell
law of supply
the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises
Supply schedule
a table that shows the relationship between the price of a good and the quantity supplied
supply curve
a graph of the relationship between the price of a good and the quantity supplied
Equilibrium
a situation in which the price has reached the level where quantity supplied equals quantity demanded
equilibrium price
the price that balances quantity supplied and quantity demanded
equilibrium quantity
the quantity supplied and the quantity demanded at the equilibrium price
surplus
a situation in which quantity supplied is greater than quantity demanded
shortage
a situation in which quantity demanded is greater than quantity supplied
law of supply and demand
the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance
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