Demand And Supply

Question 1

Law of Demand

Answer 1

When the price goes up, the quantity demanded goes down

Question 2

Quantity Demanded

Answer 2

The amount of a good that a given individual or group of individuals will choose to consume at a given price

Question 3

What is demand?

Answer 3

A family of numbers that lists the quantity demanded corresponding to each hypothetical price

Question 4

What is supply?

Answer 4

A family of numbers giving the quantities supplied at each price

Question 5

Quantity Supplied

Answer 5

The amount of a goods that suppliers will provide at a given price

Question 6

Law of Supply

Answer 6

When the price of a good goes up, the quantity supplied goes up

Question 7

Market Equilibrium

Answer 7

The price at which quantity supplied equals quantity demanded.

This is illustrated by intersecting supply and demand curves

It is also illustrated in the real world because both demanded and suppliers are satisfied aimed there is neither excess demand nor excess supply

Question 8

Benefit of Market Equilibrium

Answer 8

There are no unconsummated wealth-creating transactions. In other words, everyone is satisfied with their transactions.

The market has identified high-value buyers (people that want the good more than what they will trade for it) and low-value sellers (people who value their good lower than that which they will receive in return) brought them together, and set a price at which they can exchange goods.

Question 9

Sales Tax

Answer 9

A per unit tax that is paid directly by consumers to the government

Question 10

Excise Tax

Answer 10

A tax that is paid directly by suppliers to the government

Question 11

Demand shift

Answer 11

A sales tax (consumer tax) shifts the demand curve down meaning that there is less quantity demanded?

Question 12

Supply Shift

Answer 12

An excise tax (producer tax) shifts the supply up.

This increases the cost at which a supplier can sell a good

Question 13

Legal Incidence

Answer 13

The division of a tax burden that according to who is required under the law to pay the tax (who pays the bill?). Consumer (sales tax) or producer (excise tax).

Question 14

Economic Incidence

Answer 14

Division of a tax burden according to who actually incurs the costs of a tax. Consumer (Pd - P) or producer (P - Ps)

Question 15

Tax Incidence

Answer 15

The economic incidence of a tax is independent of its legal incidence

Question 16

Price Elasticity

Answer 16

Describes how the quantity of demand/supply react to price changes.

Question 17

Evaluate Economic Policies

Answer 17

How do we evaluate gains from trade?

1. Measure Value of exchange
2. Create a criterion that allows us to compare alternative policies according to this value

Question 18

Social/Welfare Gain

Answer 18

The sum of consumer and producer surplus serves as the value of exchange

Question 19

Efficiency Criterion

Answer 19

Compare
Marginal Value

Total value (idea)

Total value (geometry)

Question 20

Marginal Value

Answer 20

The maximum amount a consumer would be willing to pay to acquire one additional item,

Question 21

Total Value

Answer 21

The maximum amount a consumer would be willing to pay to acquire the given quantity of items

Question 22

Total Value Geometry

Answer 22

The total value of the consumers purchases is equal to the area under the demand curve out to the quantity demanded

Question 23

Efficiency Criterion

Answer 23

A normative criterion according to which your votes are weighed according to your willingness to pay for your preferred outcome. (majority rule with weighed votes). The highest-welfare outcome is preferred.

Question 24

Deadweight Loss

Answer 24

A reduction in social gains

Question 25

Deadweight Loss of a Tax

Answer 25

The deadweight loss of a tax is equal to the unmaterialized social gains from trade

Question 26

Deadweight Loss of a Subsidy

Answer 26

Equal to the social losses from too much trade

Question 27

Price Controls

Answer 27

The maximum price (ceiling) or minimum price (floor) for a good

Question 28

What do Price Control do?

Answer 28

Affects the quantity traded/equilibrium price/social gains losses

Question 29

Social Loss from Price Controls

Answer 29

Insufficient quantity traded and potential wasteful use of resources by high-valuation demanders (bid wars)

Question 30

World Price

Answer 30

Price of a good that prevails in the world market for that good. Pw

Question 31

Domestic Price

Answer 31

The equilibrium price in a closed economy P*

Question 32

SMOPEC

Answer 32

Small Open Economy: price taker in the world economy (its trade policy does not affect the world price of goods).

Question 33

Tariff

Answer 33

Tax on goods produced abroad and sold domestically

Question 34

Legal Tax Incidence

Answer 34

Because world supply is perfectly elastic, the consumer bears the entire economic burden of the tariff, irrespective of its legal incidence. Consumer price equals Pw plus the tariff.

Question 35

Benefits of International Trade

Answer 35

Increased variety of goods / lower cost through economies of scale / increased competition / enhanced flow of ideas

Question 36

Marginal Cost

Answer 36

The minimum amount for which a producer is willing to sell/produce one additional item

Question 37

Total Cost

Answer 37

The minimum amount for which a producer is willing to sell/ produce a given quantity of items

Question 38

Total Cost

Answer 38

The total cost of the producer’s sales is equal to the area under the supply curve out to the quantity demanded