CHAPTER FOUR –DEMAND, SUPPLY AND EQUILIBRIUM Flashcards
What is a perfectly competitive market?
– Every buyer pays, and every seller charges the same market price
(price takers).
– No buyer or seller is big enough to influence that market price (no
market power).
– All sellers sell an identical good or service (homogenous goods).
– Free entry and exit (see chapter 6)
What is a demand curve?
A curve that plots the quantity demanded at
different prices, it plots the demand schedule. Quantity
demanded is always on the horizontal axis and price on the
vertical axis.
The demand curve respects two properties: the price and
demand are negatively related, this means that they move in
opposite directions.
Whats the law of demand?
The Law of Demand: the quantity rises
when the price falls (holding all else equal).
What is meant by willingness to pay?
Willingness to pay is the highest price that a buyer is willing to pay for an extra unit of a good. However,
as you consume more of a good, your willingness to pay for an additional unit declines, this is referred to
as the diminishing marginal benefit.
What is an aggregated demand curve?
An aggregated demand curve is the sum of
individual demand curves. Thus, aggregation is
the process of adding up individual behaviors.
Whats the market demand curve?
The market demand curve is the sum of the individual demand curves of all the potential buyers. It plots
the relationship between the total quantity demanded and the market price, holding all else equal.
What indicates left and right shifts of the demand curve?
Left and right shifts of the demand curve occurs
when the quantity demanded changes at a given
price.
What indicates movement along the demand curve?
Movement along the demand curve occurs when
the market prices changes but the demand curve
doesn’t; a change in the price of the good itself.
The demand curve shifts when these 5 factors change:
- Tastes and preferences
- Income and wealth
- Availability and prices of related goods.
- Number and scale of buyers.
- Buyers’ beliefs about the future.
Whats the quantity supplied?
The quantity supplied is the amount of a good or service that
sellers are willing to sell at a given price.
Whats the supply schedule?
A supply schedule is a
table that reports the quantity supplied at different prices, holding
all else equal.
Whats the supply curve?
The supply curve plots the quantity supplied at
different prices.
Whats the willingness to accept?
Willingness to accept is the lowest price that a seller
is willing to get paid to sell an extra unit of a good.
Willingness to accept is the same as the marginal
cost of production.
Whats the market supply curve?
The market supply curve is the sum of the individual
supply curves of all the potential sellers. It plots the
relationship between the total quantity supplied and
the market price, holding all else equal.
There are two types of movement for shifting the supply curve:
a. Left and right shifts of the supply curve only occurs
when the quantity supplied changes at a given price.
b. Movement along the supply curve occurs if a good’s
own price changes and its supply curve hasnt shifted
The supply curve shifts when these variables change:
- Prices of inputs used to produce the good.
- Technology used to produce the good.
- Number and scale of sellers.
- Sellers’ beliefs about the future.
Whats the competitive equilibrium?
The competitive equilibrium is the crossing point of the supply
curve and the demand curve. The competitive equilibrium price
equates quantity supplied and quantity demanded. The
competitive equilibrium quantity is the quantity that
corresponds to the competitive equilibrium price.
You suddenly have an increase in your wage and you decide to buy less tuna, but more caviar. What
kind of goods are those?
A. Tuna is an inferior good and Caviar a normal good
B. Both are substitutes
C. Both are complements
D. Tuna is a normal good and Caviar an inferior good
A
Whats the quantity demanded?
The amount of a good that buyers are willing to
purchase at a given price.
Whats the demand schedule?
A table that reports the quantity demanded at
different prices, holding all else equal.
Whats a demand curve?
Plots the quantity demanded at different prices.
Whats the market demand curve?
The sum of the individual demand curves of all
the potential buyers. The market demand curve
plots the relationship between the total quantity
demanded and the market price, holding all else
equal.
When do shifts of the demand curve occur?
- tastes and preferences
- income and wealth
- availability and prices of related goods
- number and scale of buyers
- buyers’ expectations about the future
Whats the demand curves response to an increase in income for a normal good & an inferior good?
Normal good: demand shifts right
Inferior good: demand shifts left
Whats the demand curves reaction to the fall in another goods price for substitutes and complements?
Substitutes: demand shifts left
Complements: demand shifts right
What are normal goods?
Demand of a good goes UP if income of buyer
goes up.
Example: Fuel (travel more), Cocktails
What are inferior goods?
Demand of a good goes DOWN if income of buyer
goes up
Example: Canned food, Albert Heijn’s wine
What are substitutes and what is there demand -price relation?
Demand of good A increases with an increase in
price of good B (and vice versa)
Examples: Coca Cola – Pepsi, Beef - Pork
What are complements and what is their demand-price relation?
Demand of good A decrease with an increase in
price of good B (and vice versa)
Examples: Coffee – Milk, Printer – Ink
cartridges
What is excess demand?
Occurs when consumers want more than suppliers provide at
a given price. This situation results in a shortage.
What is excess supply and what does it result in?
Occurs when suppliers provide more than consumers want at
a given price. This situation results in a surplus.
Whats the formula for linear (inverse) demand?
P = a - b·Q
Whats the formula for linear (inverse) supply?
P = a + b·Q
- In a perfectly competitive market, (1)
2
- In a perfectly competitive market, (1) sellers
all sell an identical good or service, and (2)
any individual buyer or any individual seller
isn’t powerful enough on his or her own to
affect the market price of that good or service.
The demand curve plots the relationship
between…
The demand curve plots the relationship
between the market price and the quantity of
a good demanded by buyers.
The supply curve plots the relationship
between…
The supply curve plots the relationship
between the market price and the quantity of a
good supplied by sellers.
The competitive equilibrium price equates…
The competitive equilibrium price equates the
quantity demanded and the quantity supplied.
When prices are not free to fluctuate, markets
fail to…
When prices are not free to fluctuate, markets
fail to equate quantity demanded and quantity
supplied.
You’ve been offered a job interview in Berlin for after graduation, but the company does not cover your
travel expenses. You really want the job, so you have to decide between four options of getting there.
At the moment you work at your current flexible student job for 10€ per hour instead of traveling.
Which one should you take?
1. Car: 6h travel; 50€ fuel
2. Plane: 3h travel; 100€ ticket
3. Train: 5h travel; 70€ ticket
4. Bus: 8h travel; 40€ ticket
A. Go by car
B. Go by plane
C. Go by train
D. Go by bus
- -> A
1. Car: Total cost = 50€ + 6 ∗ 10€ = 110€
2. Plane: Total cost = 100€ + 3 ∗ 10€ = 130€
3. Train: Total cost = 70€ + 5 ∗ 10€ = 120€
4. Bus: Total cost = 40€ + 8 ∗ 10€ = 120€
If taxes are imposed on the supplier, in what direction does the supply curve shift?
If the government pays a subsidy to the supplier, in what direction does the supply curve shift?
A. Supply curve shifts to the left; supply curve shifts to the left.
B. Supply curve shifts to the right, supply curve shifts to the left.
C. Supply curve shifts to the left; supply curve shifts to the right.
D. Supply curve shifts to the right, supply curve shifts to the right.
–>C
Suppliers have a higher cost of production because of the tax and therefore supply less.
Suppliers have a lower cost of production because of the subsidy and therefore supply more.
Consider the exam including both economics and accounting questions all of the same difficulty. You
have studied more for accounting than economics, so you are able to answer 3 accounting questions in
the same time as 2 economics questions. What is your opportunity cost of answering 1 economics
question?
A. 3 accounting questions.
B.3/2 accounting questions.
C. 2 accounting questions.
D.2/3
accounting questions.
Opportunity Cost A = Loss in B / Gain in A
In this case, when considering the opportunity costs of answering economics questions (A), Loss in B is defined as the number of accounting questions not answered (3). Gain in A is defined as the economics questions you answer (2). This results in an opportunity cost of answering economics questions of: 3 / 2
accounting questions.
Imagine the Maastricht tutoring market is perfectly competitive with a demand curve for Economics crash course tutorials of 𝐷(𝑃) = 100 – 2𝑃 and a supply curve of S (P) = 2𝑃 / 3 . What would be the equilibrium quantity? A. 37.5 B. 30 C. 25 D. 27.5
C
- Set demand = supply: 100 – 2𝑃 =2𝑃 / 3
- Solve for P: 𝑃 = 37.5
- Plug price into the demand or supply function to compute the quantity: 100 − 2 ∗ 37.5 = 25
What is not a characteristic of a perfectly competitive market?
A. Sellers are producing goods that are identical (homogeneous)
B. Firms can enter or exit the market freely
C. The well-being in society as a whole is maximized because individuals focus on the welfare of
others
D. The market price is the only acceptable price (price-takers)
C
