Chapter 4 (DEMAND & SUPPY) Flashcards
1
Q
A market
A
Interactions between buyers and sellers
2
Q
“Free Markets”
A
YES to gov. Property rights
3
Q
Shortage
A
- EXCESS DEMAND (Qd>Qs)
- creates pressures for prices to rise and provides incentives for businesses to increase Qs so that consumers then decrease Qd which ELIMINATES the shortage
4
Q
Surplus
A
- EXCESS SUPPLY (Qs>Qd)
- creates pressures for prices to decrease which provides incentives for business to decrease Qs so consumers then increase Qd which ELIMINATES the surplus
5
Q
Market clearing price/ Equilibrium Price
A
The price that equalizes quantity demanded and quantity supplied… blaming the forces of competition and cooperation so that there is no tendency for change
6
Q
Consumer Surplus
A
- (1/2) x Q x (P1-P0)
- or maximum price willing to pay minus actual price
- top triangle on graph
7
Q
Producer surplus
A
- (1/2) x Q x (P2-P0)
- or minimum price willing to pay minus actual price
- bottom triangle
8
Q
Deadweight Loss
A
- difference between maximum total surplus (original gain) and actual gain
- 1/2 x (P2-P1) x (Q1-Q2)
- measures inefficiency
Deadweight loss of producing too little: inner triangle on the left
Deadweight loss of producing too much: inner triangle on the right
9
Q
Total Surplus
A
- consumer surplus PLUS producer surplus
10
Q
Efficient market outcome
A
- consumers buy only products and services where marginal benefit is greater than marginal cost
- at the quantity of an efficient market outcome… marginal benefits EQUAL marginal costs
