Demand and Supply Flashcards
What factors can shift the supply curve?
TWIGE
Technology
Weather
Input Costs (wages, fuel costs)
Government regulations (stringent safety measures or pollution control or wastage regulations)
Expectations- if a firm expects the price of its product to fall in the future it has an incentive to
supply more today
What factors can shift the demand curve?
SCIF
Substitute- If the price of a substitute good changes
Complement- If the price of a complement good changes
Income-Change in consumers income (positive correlation if a normal good)
Fashion
Inferior good
As income rises consumption falls
Luxury good
As income rises, consumption disproportionately rises.
Reservation price
Maximum that a consumer is willing to pay for a good
Consumer surplus
consumer surplus is the difference between the maximum
price (also called the reservation price) that she is willing to pay for a given
amount of a good or service and the price she actually pays
Producer surplus
The gain for sellers that is the difference between the minimum price that suppliers would be willing to accept to sell an item and the price it is actually sold for
Price controls
Price controls are government rules or laws setting price floors or ceilings that
forbid the adjustment of prices to clear markets
Whats a price ceiling, why might they be implemented?
Price ceilings make it illegal for sellers to charge more than a specific maximum
price. Ceilings may be introduced when a shortage of a commodity threatens to
raise its price a lot (such as food prices during a war). High prices are the way a
free market rations goods in scarce supply. This solves the allocation problem,
ensuring that only a small quantity of the scarce commodity is demanded, but may
be thought unfair, a normative value judgement.
High food prices mean hardship for
the poor
What can the effect of price ceilings be?
The price ceiling can create a shortage of supply relative to demand by
prices being forced below their equilibrium level( PG 130 )
Draw the effect of a price ceiling in a graph
PG 130
Whats an example of a price floor
Minimum wage
Will a price floor being implemented by the government always distort the market?
Not necessarily- if the price floor is below the market equilibrium, it’ll have no effect.
What is a price floor?
Whereas the aim of a price ceiling is to reduce the price for consumers, the aim of a
floor price is to raise the price for suppliers.
economic surplus
economic surplus created by a market transaction by the sum
of the consumer and producer surplus.
