Demand And Supply Flashcards
Law of Demand
When the price goes up, the quantity demanded goes down
Quantity Demanded
The amount of a good that a given individual or group of individuals will choose to consume at a given price
What is demand?
A family of numbers that lists the quantity demanded corresponding to each hypothetical price
What is supply?
A family of numbers giving the quantities supplied at each price
Quantity Supplied
The amount of a goods that suppliers will provide at a given price
Law of Supply
When the price of a good goes up, the quantity supplied goes up
Market Equilibrium
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
Benefit of Market Equilibrium
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.
Sales Tax
A per unit tax that is paid directly by consumers to the government
Excise Tax
A tax that is paid directly by suppliers to the government
Demand shift
A sales tax (consumer tax) shifts the demand curve down meaning that there is less quantity demanded?
Supply Shift
An excise tax (producer tax) shifts the supply up.
This increases the cost at which a supplier can sell a good
Legal Incidence
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).
Economic Incidence
Division of a tax burden according to who actually incurs the costs of a tax. Consumer (Pd - P) or producer (P - Ps)
Tax Incidence
The economic incidence of a tax is independent of its legal incidence
Price Elasticity
Describes how the quantity of demand/supply react to price changes.
Evaluate Economic Policies
How do we evaluate gains from trade?
- Measure Value of exchange
- Create a criterion that allows us to compare alternative policies according to this value
Social/Welfare Gain
The sum of consumer and producer surplus serves as the value of exchange
Efficiency Criterion
Compare
Marginal Value
Total value (idea)
Total value (geometry)
Marginal Value
The maximum amount a consumer would be willing to pay to acquire one additional item,
Total Value
The maximum amount a consumer would be willing to pay to acquire the given quantity of items
Total Value Geometry
The total value of the consumers purchases is equal to the area under the demand curve out to the quantity demanded
Efficiency Criterion
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.
Deadweight Loss
A reduction in social gains
Deadweight Loss of a Tax
The deadweight loss of a tax is equal to the unmaterialized social gains from trade
Deadweight Loss of a Subsidy
Equal to the social losses from too much trade
Price Controls
The maximum price (ceiling) or minimum price (floor) for a good
What do Price Control do?
Affects the quantity traded/equilibrium price/social gains losses
Social Loss from Price Controls
Insufficient quantity traded and potential wasteful use of resources by high-valuation demanders (bid wars)
World Price
Price of a good that prevails in the world market for that good. Pw
Domestic Price
The equilibrium price in a closed economy P*
SMOPEC
Small Open Economy: price taker in the world economy (its trade policy does not affect the world price of goods).
Tariff
Tax on goods produced abroad and sold domestically
Legal Tax Incidence
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.
Benefits of International Trade
Increased variety of goods / lower cost through economies of scale / increased competition / enhanced flow of ideas
Marginal Cost
The minimum amount for which a producer is willing to sell/produce one additional item
Total Cost
The minimum amount for which a producer is willing to sell/ produce a given quantity of items
Total Cost
The total cost of the producer’s sales is equal to the area under the supply curve out to the quantity demanded
