Chapters 3&4 Flashcards
market economy
resources allocated amount households and firms with little or no government interference
invisible hand
refer to unobservable market forces
guides resources to their highest-valued use
“coined by Adam Smith”
competitive market
many buyers and sellers that each has a small (negligible) impact on market price and output
-surpluses and shortages are resolved through process of price adjustment
imperfect market
either buyer or seller can influence the market price
market power
firm’s ability to influence the price of a good or service by exercising control over its demand, supply, or both
monopoly
exists when single company supplies the entire market for a particular good or service
quality demanded
the amount of a good or service that buyers are willing and able to purchase at the current price
law of demand
if all other things are equal, quantity demanded falls when price rises, and quantity demanded rises when price falls
demand schedule
table that shows the relationship between the price of a good and the quantity demanded
demand curve
graph of the relationship between the prices in the demand schedule and the quantity demanded at those prices
market demand
sum of all the individual quantities demanded by each buyer in the market at each price
price change
movement along demand curve (cannot shift the demand curve)
Factors that shift the Demand Curve LEFT
Decrease Demand
- income falls (demand for a normal good)
- income rises (demand for an inferior good)
- price of a substitute good falls
- price of a complementary good rises
- good falls out of style
- belief that the future price of the good will decline
- number of buyers in market falls
- excise or sales taxes increase
Factors that shift Demand Curve RIGHT
Increase Demand
- income rises (demand for a normal good)
- income falls (demand for an inferior good)
- price of substitute good rises
- price of complementary good falls
- good is currently in style
- belief that the future price of good will rise
- number of buyers in the market increase
- excise or sales taxes decrease
purchasing power
how much you can afford
-value of income
normal good
consumers buy more as income rises, holding all other factors constant
(ex: meal at restaurant)
inferior good
purchased out of necessity rather than choice
ex: hamburger and ramen noodles instead of filet mignon
complements
two goods that are used together
- when price of complementary good increases, demand for related good decreases
(ex: demand of ink cartridges goes down = photo paper demand goes down) - not likely to use one without the other
substitues
two goods that are used in place of each other
- when price of substitute good rises, quantity demanded of good decrease and demand for related good increases
(ex: playstation 4 price goes up and quantity demanded decline = demand for alternative good increases = Xbox demand increase)
With DEMAND, price and output
are negatively related (move in opposite direction)
with SUPPLY, price level and quantity
are positively related (move in same direction)
quantity supplied
amount of a good or service that producers are willing and able to sell at the current price
law of supply
states that..
- quantity supplied increases when the price rises
-quantity supplied falls when price falls
(all other things being equal)
supply schedule
table that shows the relationship between the price of a good and the quantity supplied
supply curve
graph of relationship between prices in the supply schedule and quantity supplied at those prices
market supply
sum of quantities supplied by each seller in market at each price
-calculate: adding together the quantity supplied by individual vendors
Factors that shift the Supply Curve LEFT (Decrease Supply)
- cost of an input rises
- business taxes increase or subsidies decrease
- number of sellers decreases
- price of product is anticipated to rise in the future
Factors that Shift Supply Curve RIGHT (Increase Supply)
- cost of input falls
- business taxes decrease or subsidies increase
- number of sellers increases
- price of product is expected to fall in future
- business deploys more efficient technology
Factors that shift supply curve
(PRICE does NOT cause shift in supply)
- cost of inputs
- changes in technology
- changes in production process
- taxes
- subsidies
- number of firms in industry
- price expectations
inputs
resources used in production process
workers, equipment, raw materials, buildings, and capital goods
Technology improvement enables…
-producer to increase output with same resources
- to produce a given level of output with fewer resources
=producers of good discover new and improved technology or better production process THEN increase in supply & supply curve shift to right
subsidy
payment made by government to encourage consumption or production of a good or service
increase in number of sellers in industry…
additional firm that enters market increases available supply of good = supply curve shifts right from increased production
VISE VERSA:
-decrease number of firms in industry= supply curve shifts to left
Technology
(PCs) both demand and supply increases through time
-demand increases as consumers find more uses for new technology
(demand does not increase as fast as supply
equilibrium
point where demand curve and supply curve intersect
equilibrium price
price which quantity supplied is equal to quantity demanded
-aka: market clearing price or price clears the market
-movements away from point throw market out of balance
-
Price Above Equilibrium
surplus exists
Price Below Equilibrium
shortage exists
equilibrium quantity
amount which quantity supplied is equal to quantity demanded
law of supply and demand
states: market price of any good will adjust to bring quantity supplied and quantity demanded into balance
shortage
occurs whenever quantity supplied is less than quantity demanded
aka: excess demand
surplus
occurs whenever quantity supplied is greater than quantity demanded
aka: excess supply
Demand Increases: Supply Unchanged
demand curve shifts right
result: equilibrium price and equilibrium quantity increase
Supply Increases: Demand Unchanged
supply curve shifts right
result: equilibrium price decreases and equilibrium quantity increases
Demand Decreases: Supply Unchanged
demand curve shifts left
result: equilib. price and equilb. quantity decrease
Supply Decreases: Demand Unchanged
supply curve shifts left
result: equilib. price increases and equilib. quantity decreases
markets work because…
buyers and sellers can rapidly adjust to change prices that bring balance
Demand and Supply BOTH Increase
Price and Quantity When Demand and Supply BOTH Change
- demand and supply curves shift RIGHT
- Shift reinforce each other in quantity (increases), but acts as countervailing forces along price axis
- price could be higher or lower
Demand and Supply BOTH Decrease
Price and Quantity When Demand and Supply BOTH Change
- demand and supply curves shift LEFT
- shift reinforced to quantity (decreases) but acts as countervailing forces along Price axis
- price higher or lower
Demand Increases and Supply Decreases
Price and Quantity When Demand and Supply BOTH Change
- demand curve shifts to RIGHT = supply curve shift LEFT
- shifts reinforced with respect to price (increases) but act as countervailing forces along Quantity axis
- quantity could be higher or lower
Demand Decreases and Supply Increases
Price and Quantity When Demand and Supply BOTH Change
- demand curve shifts LEFT = supply curve shift RIGHT
- shifts reinforce each other with respect to price (decreases) but act as countervailing forces along Quantity axis
- quantity could be higher or lower
Elasticity
measure of responsiveness of buyers and sellers to changes in price or income
price elasticity of demand
measures responsiveness of quantity demanded to a change in price
immediate run
no time for consumers to adjust their behavior
short run
period of time when consumers can partially adjust their behavior
-make decisions that reflect our immediate or short-term wants, needs, or limitations
long run
- period of time when consumers have time to fully adjust to market conditions
- make decisions that reflect our wants, needs, and limitations over long time
price elasticity of demand formula
price elasticity of demand = percentage change in quantity demanded// percentage change in price
total revenue
amount that firm receives from sale of goods and services
- particular good= price of good x quantity of good sold
income elasticity of demand
measures how a change in income affects spending
E1 = % change in quantity demanded// % change in income
cross-price elasticity of demand
measures responsiveness of quantity demanded of one good to a change in price of related good
Ec = % change in quantity demanded of one good// % percentage change in price of related good
price elasticity of supply
aka: elasticity of supply & supply elasticity
measure of how responsiveness of quantity supplied to change in price
Es = % change in quantity supplied// % change in price
% Change in Quantity Demanded
(New QD-Old QD)/OQD) *100
% Change in Price
(New Price - Old Price/Old Price) * 100
Price Elasticity Demand and Price ED=0
Perfectly Inelastic
-Price Does Not matter
(vet bill to save pet)
Price Elasticity Demand and Price 0 >ED >-1
Relatively Inelastic
-Price less important than the quantity purchased
(electricity)
Price Elasticity Demand and Price ED = -1
Unitary
-price and quantity are equally important
Price Elasticity Demand and Price -1 > ED > - Infinity
Relatively Elastic
-Price is more important than the quantity purchased
(apples)
Price Elasticity Demand and Price ED = - infinity
Perfectly elastic
-Price is everything
($10 bill)
Income Elasticity
EI < 0
Inferior Good
No subcategory
(mac & Cheese)
Income Elasticity 0
Normal Good
Necessity
(milk)
Income Elasticity EI > 1
Normal Good
Luxury
(diamond ring)
Cross-Priced Elasticity
Ec > 0
Substitute Good
Pizza Hut & Domino
Cross-Priced Elasticity
Ec=0
No Relationship of Good
Basketball & Bedroom slippers
Cross-Priced Elasticity
Ec<0
Complement Good
Turkey & Gravy
Price Elasticity of Supply
Es =0
Perfectly inelastic
ocean front land
Price Elasticity of Supply
0 < Es <1
Relatively Inelastic
Cell Phone Tower
Price Elasticity of Supply
Es > 1
Relatively Elastic (Hot Dog Vendor)
