Demand and Supply Flashcards
demand curve
function that shows the quantity demanded at different prices
quantity demanded
quantity buyers are willing and able to purchase at a particular price
demand curve horizontally
quantity buyers are willing and able to purchase at a given price
demand curve horizontally
maximum price that buyers are willing to pay at a given unit of something
consumer surplus
consumer’s gain from exchange
-difference between maximum price a consumer is willing to pay for a given quantity and the market price
total consumer surplus
sum of consumer surplus of all buyers
measured by the area below the demand curve and above the price
demand curve shifts due to…
increase and decrease in market demand
increase in the demand curve means
an increase in demand means an increase in the quantity demanded at every price, or equivalently, it means an increase in the maximum willingness to pay for a given quantity. (moves right)
what causes increase in demand
anything that increases the quantity demanded at a given price or that which increases the maximum willingness to pay for a given quantity.
what factors increase in demand? Willing to pay more?
income, ;population, price of substitutes, price of compliments, expectations, and tastes
effect of income
depends on good in question.
- normal good: demand increases when income increases. and vice.versa ex: being able to afford better goods/services
- inferior good: when income goes up, demand goes down and when income goes down, demand goes up. ex: canned soup. during recession vs boom time.
population
as population of an economy changes, the number of buyers of a particular good also changes, directly influencing its demand.
ex: diapers if birth rates drop or baby boomers getting older triggering more services and goods for this particular generation - drugs, retirement, services, golf goes up
decrease in demand
shift inwards towards origin. decrease in quantity demanded at every given price or a decrease in the maximum willingness to pay for each given quantity
substitutes
two goods are substitutes if an increase in the price of one good leads to an increase in the demand for the good (and vice versa).
ex: nikes goes up then rebooks increase as well and vice versa. iTunes vs Spotify change in price
compliments
goods that that tend to go together well.
increase in price Good A = decrease in demand for Good B
or
decrease in demand of good A = increase in demand of good B
expectations
expectations of a higher (lower) price for a good in the future increases (decreases) current demand for the good
example of expectations
consumers will adjust their current spending in anticipation of the direction of future prices in order to obtain the lowest price possible.
Ex: hurricane is coming - expect prices to go up, so you will buy (increase demand) now.
xbox example of expectations
we expect.price to drop before xmas, therefore sales in November will be low
apple example of expectations
each time people expect a new model, they stop buying current iPhones. since they don’t notify of new iPhones, sales drop
taste
an important demand shifter and tastes change all the time. Tastes differ among consumers and they also differ over time because of seasonal changes or fashion or fads
ex: demand for boots in October and demands for bathing suits in June
a change in quantity demanded is NOT
the same as a change in demand
a change in quantity demanded is
a movement along a fixed demand curve - MOVES IN FIXED CURVE
a change in demands
only happens when a non-price factor - SHIFT IN CURVE - MOVES CURVE INWARD OR OUTWARD
a change in demand is
a shift in the entire demand curve
example for a change in quantity demanded
he decrease in demand shifts the entire demand curve down and to the left and leads, as we know, to a lower quantity at every price.
In the first case, on the left, we have a decrease in the quantity demanded—that is a movement along a fixed demand curve.
example of change in demand
e have a decrease in demand. The entire demand curve shifts down and to the left. changes in price and quantity
Supply Curve
represents behavior of sellers.
shows the quantity supplied at different prices
quantity supplied
is the quantity that producers are willing and able to sell at a particular price
supply curve read horizontally
how much are suppliers willing and able to sell at a given price
supply curve read vertically
the minimum price at which suppliers will set at a given quantity
producer surplus
producers gain from exchange. difference between market price and minimum price producers are willing to sell at a given quantity
total producer surplus
sum of the producer surplus of each seller
graphic producer surplus
area above supply curve and below the price
formula for area of a triangle
1/2 (base x height)
marginal supplier
on margin, does not earn a producer surplus. the supplier costs are equal to price, so they do not earn a producer surplus
increase in quantity
moves to the right and down. at any given price, with the new supplier, with the increased supply, suppliers are now willing to supply a greater quantity. greater quantity at the same price and willing to sell same quantity at lower price
increase supply means
reduction in cost
decrease in supply (be able to sell)
increase in cost
supply shifters
mainly a change in costs
- tech innovations
- input prices
- costs of productions
- taxes and subsidies
- expectations
- entry and exit of producers
- changes in opportunity costs
technological innovation
lowers costs and therefore increases the supply. That means that sellers are willing to supply a greater quantity at a given price, or, equivalently, they’re willing to sell a given quantity at a lower price.
an increase in the price of an input will
decrease supply
ex: increase environmental regulations = decrease in supply
A tax on output is equivalent to
an increase in costs, and therefore a tax will decrease supply.
subsidy
opposite of an tax. instead of taking from any unit produce, the gvmnt gives for any unit produced.
a subsidy is equivalent to
a decrease in the firms costs and therefore increases supply
expectations can also shift the supply curve
the expectation of a higher price for a good in the future increases the cost of supplying now and thus decreases current supply of the good (and vice versa)
supply today vs increase in the future
put into storage with expectation of future price increase
entry and exit of producers in the market
number of sellers of a particular good changes, directly influencing supply
entry of producers =
more sellers in the marker, increase in supply
exit of producers =
fewer sellers in the market, therefore decrease in supply
changes in opportunity cost
inputs used in production have opportunity costs, and sellers will choose to employ those inputs in the production of the highest priced final goods.
Free markets
maximizes the gains from trade or the gain from trade are maximized at the equilibrium price and quantity. And what this means is that the supply of goods is bought by the buyers with the highest willingness to pay.
The supply of goods are sold by the suppliers with the lowest costs. And between the buyers and the sellers, there are no unexploited gains from trade and no wasteful trades. Okay, that concludes our review on to some new material.
Vernon Smith
tested the supply and demand model
In market equilibrium, there are
no unconsummated wealth-creating transactions.
What happens at market equilibrium?
the market has identified the high-value buyers and the low-value sellers, brought them together, and set a price at which they can exchange goods.
the market moves goods from lower-to higher-valued uses and thus creates wealth.
Invisible hand
Economists often personify market forces by saying that the market works with an “invisible hand.”
