Choices Flashcards
Week 2
What is a demand curve?
This is a function that shows the quantity demanded at different prices.
What is the quantity demanded?
The quantity that buyers are willing and able to buy at a certain price.
What is the law of demand?
typically negatively sloped
The higher the price the lower the quantity demanded.
What is consumer surplus?
The difference between the price is a consumer is willing to pay for a certain quantity and the market price (Consumers gain from exchange)
How do you find the total consumer surplus?
The area beneath the demand curve and above the price.
What are the six demand shifters? (6 marks)
Tastes
Income
Population
Price of Substitutes
Price of Complements
Expectations
How does TASTE shift demand?
Changes in taste increase or decrease the demand for a certain good.
How does INCOME shift demand?
The reacher people get the more stuff they buy.
What is it called when an increase in income increases demand for a good?
Normal good
What is it called when a decrease in income decreases the demand for a good?
Inferior good
How does POPULATION shift demand?
An increase in population typically increases demand.
Shifts in subpopulations change the demand for certain goods e.g. aging and young.
How do PRICES OF SUBSTITUTES shift demand?
A substitute = dupe
A decrease in the price of a substitute will decrease the demand for the other good.
How do PRICES OF COMPLEMENTS shift demand?
A complement is a good that goes together with another (e.g. iPhone + Airpods)
A drop in the price of a complementary good will increase its demand.
How do EXPECTATIONS shift demand?
If the future supply is predicted to decrease, the current demand of the good will increase.
What is a supply curve?
This is a function that shows the quantity supplied at different prices.
What is the quantity supplied?
This is a quantity that sellers are willing and able to sell at a certain price.
What is the law of supply?
Usually positively sloped
The higher the price the greater the quantity supplied.
What is producer surplus?
The difference between the market price and the minimum price at which a producer would be willing to sell a particular quantity.
Total Producer Surplus
The area above the supply curve and below the price.
What are the five supply shifters? (5 marks)
Technological innovations
Taxes and Subsidies
Expectations
Entry and Exit of producers
Changes in Opportunity costs
How do TECHNOLOGY INNOVATIONS shift supply? What else can change the supply?
Improvements in technology can reduce costs thus increasing supply.
A reduction in input prices also reduces costs and has a similar effect.
How do TAXES AND SUBSIDIES shift the supply?
A tax on output has the same effect as an increase in costs.
A subsidy is the reverse of a tax
How do EXPECTATIONS shift supply?
Suppliers who expect prices to increase will store goods for future sales and sell less today, decreasing the current supply.
The supply curve today shifts left.
How does the ENTRY & EXIT of producers shift supply?
The entry of new producers increases supply, shifting the curve down and
to the right.
How does change in OPPORTUNITY COST shift supply?
An increase in opportunity costs reduces supply.
With the new legal option to grow hemp, the
the opportunity cost of growing wheat increases.
Some farmers will shift away from producing
wheat, and will start growing hemp
The supply curve of wheat shifts to the left
What is market equilibrium?
The price at which the quantity demanded is equal to the quantity supplied.
What is comparative advantage?
The ability to produce goods with a lower opportunity cost than another producer.