chapter three - supply, demand, and prices Flashcards
demand
an economic principle referring to a consumers desire to purchase goods and services and willingness to pay a price for a specific good or service
- what people want
the law of demand
a fundamental principle of economics that states that at a higher price consumers will demand a lower quantity of a good
substitution effect
consumers switching to cheaper products as prices increase
income effect
- you spend less if you make less
- a microeconomics term descriving how changes to consumers real income levels can affect their purchasing patterns
market demand schedule
- a listing of how much of a good or service all consumers are willing to purchase at each price
- this shows the demand of all people in a market who are willing and able o buy a good/service
reading demand curves
- horizontally: the quantity buyers are willing and able to purchase at a given price
- vertically: the maxiumum price that buyers are willing to pay for a given unit of oil
ceteris paribus
all other things being equal
non-price determinates of demand
- income (normal and inferior goods)
- consumer expectations
- changes in demographics
- changes in pop size
- consumer taste and advertising
- prices of related goods
prices of related goods
- complements: 2 goods that are bought and used together
- substitutes: goods that are used in place of one another
elasticity of demand
- elastic: purchasing less after a small price increase
- inelastic: purchasing the same amount, or slightly less, after a large price increase: gas - have to have it
calculating elastic
- price range vary at every price level and can be highly elastic at one price and inelastic at anoter
- values: demand for a good at a certain price is less than 1, it is inelastic; more than 1 is elastic
factors affecting elasticity
- availability of substitutes
- relative imporatance
- neccessities vs. luxuries
- change over time
elasticity and pricing
a measurement of the change in demand for a good or service in relation to a change in its price
law of supply
- the microeconomic law that states that, all other factors being equal as the price of a good or service increases, the quantity of goods or services that suppliers offer will increase and vice versa
supply curve
a graphic rep. of the corrlation between the cost of a good or service and the quality supplied for a given period
elasticity of supply and time
short run
long run
cost of production
the direct and indirect costs businesses face from manufacturing a product or providing a service
labor and output
marginal product of labor
- increasing marginal returns
- diminishing marginal returns
- negative marginal returns
production costs
- fixed costs
- variable costs
- total costs
- marginal cost
fixed v variable
- the cost associated w your business’ product that must be paid regardless of how much you sell
- the cost directly related to the sales volume of your business
Marginal and average total cost
- if marginal cost is below avg. total cost, avg. total cost will decline toward marginal cost
- if marginal cost is above avg. total cost, avg. total cost will increase
- marginal cost intersects avg. total cost and avg. variable cost curves at their minimum points
setting output
- marginal revenue and marginal cost
- response and price change
marginal revenue
marginal revenue = change in total revenue/ change in quantity sold
shutdown decision
- a level of operations at which a company experiences no benefit for continuing operations and therefore decides to shut down temp. - or in some cases permanently
changes in supply
-when the suppliers of a given good or service alter production or output
input cost
- effects of rising costs
- technology
govt. influences on supply
subsidies, excise taxes, regulation
supply in the global economy
- conditions in other countries
- breaks in the supply chain
other influences on supply
- future expectations of prices
- # of suppliers
equilibrium
a state in which the supply and demand for a given goods or service are in balance
disequilibrium
- excess demand: shortage, actual market price is below the equlibrium price
- excess supply: surplus, actual price is higher than equlibrium
govt. intervention
- price ceilings: max price for a good or services (rent control)
- price floors: minimum price for a good or service ( minimum wage, agriculture price supports)
what are the changes in market equalibrium
changes in price
shifts in supply, finding new equalibrium (surplus)
the role of prices
- tools for distributing goods and resources
- moves factors of production to producers
- moves finished goods to buyers
advantages
- incentives
- signals - signals in price lowering, the demand lowers
- flexibility (supply shock, rationing
-“free” nothing is free
wide choices of goods
- rationing and shortages
- black market
efficient resource allocation
- attained when the cost of goods and services = marginal costs
- aids in profit maximization
- price and the marginal cost of production are identical in a market w perfect competition
profit incentive
- the diff. between a business’s total revenues and its total cost
- the profit incentive is the desire that persuades entrepreneurs to establish new businesses or explain existing ones, improve products and cut costs of production
- how to make more money
- in a market economy, the profit incentive spurs on efficiency, growth and economic progress
market problems
- imperfect performance: making wrong choices
- imperfect competition: fewer sells negative externalizes: not paid by producers but by consumers and society (pollution)
