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2. CFA Economics > Demand and Supply Analysis > Flashcards

Demand and Supply Analysis Flashcards

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1
Q

What is a good(or product) market?

A

Markets for goods and services to consumers.

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2
Q

What is a factor market?

A

A market for factors of production (raw materials, goods and services used in production).

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3
Q

What are intermediate goods?

A

Goods and services used in the production of final goods and services.

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4
Q

At higher prices the quantity supplied is… ?

A

Greater

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5
Q

At lower prices the quantity demanded is…?

A

Greater

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6
Q

What is a demand function?

A

Provides the quantity demanded as a function of price of the good or service, the prices of related goods or services, and some measure of income.

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7
Q

What is a supply function?

A

Provides the quantity supplied as a function of price of the good or service and the prices of productive inputs, and depends on the technology used to produce the good or service.

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8
Q

What does the change in quantity demanded (supplied) in response to a change in price represent?

A

A movement along a demand (supply) curve, not a change in demand (supply).

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9
Q

What do changes in demand (supply) refer to?

A

Shifts in a demand (supply) curve.

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10
Q

What is demand affected by? What causes a demand shift to the right?

A

Demand is affected by changes in consumer tastes and typically increases (shifts to the right) with increases in income, increases in the price of substitute goods, or decreases in the price of complementary goods.

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11
Q

What causes supply to be increased?

A

Supply is increased (shifted to the right) by:

  1. Advances in production technology
  2. Decreases in input prices (prices of factors of production).
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12
Q

How is the aggregate or market demand (supply) function calculated?

A

By summing the quantities demanded (supplied) at each price for individual demand (supply) functions.

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13
Q

What is a stable equilibrium?

A

One for which movement of the price away from its equilibrium level results in forces that drive the price back towards equilibrium.

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14
Q

What is an unstable equilibrium?

A

One for which a movement of the price away from its equilibrium level results in forces that move the price further from its equilibrium level.

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15
Q

How is the aggregate or market demand (supply) function calculated?

A

By summing the quantities demanded (supplied) for individual demand (supply) functions.

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16
Q

What does inverting an aggregate demand (supply) function produce?

A

An aggregate demand (supply) curve.

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17
Q

How is excess market supply or excess market demand for any price calculated?

A

By using aggregate demand and supply functions, inserting the market price of the good into each, and comparing the resulting (market) quantities supplied and demanded.

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18
Q

What is excess market supply?

A

Quantity supplied is greater than quantity demanded.

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19
Q

What is excess market demand?

A

Quantity demanded is greater than quantity supplied.

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20
Q

What is a common value auction?

A

An auction for a good (e.g., rights to mineral extraction) which has the same value to all bidders, even though this value may not be known with certainty at the time of the auction. The highest bidder may be the one who most overvalues the item (winner’s curse).

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21
Q

What is a private value auction?

A

An auction for a good (e.g., Van Gogh painting) for which the value is different to each bidder. Bidders are not expected to bid amounts greater than their private value of the item.

22
Q

What is an ascending price(AKA English) auction?

A

The highest bidder wins the item and pays the amount bid.

23
Q

What is a sealed bid auction?

A
  1. Each bidder’s bid is unknown to other bidders and the high bidder wins the item and pays the amount bid.
  2. The value to each bidder is referred to as the bidder’s reservation price.
  3. The bid made by the winner may be less than his reservation price.
24
Q

What is a second price(AKA Vickrey) auction?

A

The winning (highest) bidder pays the amount bid by the second-highest bidder. In this format, there is no incentive for a bidder to bid less than his reservation price.

25
Q

What is a descending(AKADutch auction)?

A

The auction begins with a high price which is reduced in increments until a buyer accepts the price. When multiple units are available, bidders may accept the price for some units and the price is subsequently reduced incrementally until the last of the available units are accepted.

26
Q

Describe the auction for US Treasury securities:

A

The auction of U.S. Treasury securities is done with a modified Dutch auction in which all bidders pay the price at which the last of the units available are purchased. Non-competitive bids may be placed, which are filled in their specified amounts at the final price.

27
Q

What is the result to market equilibrium of a government imposition of a price ceiling?

A

Imposition of an effective maximum price (price ceiling) by the government results in excess demand.

28
Q

What is the result on market equilibrium of a government imposition of an effective minimum price (price floor)?

A

Results in excess supply.

29
Q

How does a government imposition of an effective quota effect supply?

A

Reduces supply.

30
Q

How does payment of a subsidy to producers affect supply?

A

Increases supply.

31
Q

How does an imposition of a tax on suppliers affect supply?

A

Reduces supply.

32
Q

How does an imposition of a tax on consumers affect demand?

A

Reduces demand.

33
Q

What is consumer surplus?

A
  1. The excess consumers would be willing to pay above what they actually pay for the equilibrium quantity of a good or a service
  2. Represented by the triangle bounded by the demand curve, the equilibrium price, and the left-hand axis.
34
Q

What is producer surplus?

A
  1. The excess that suppliers receive over the total cost to produce those units.
  2. Represented by the triangle bounded by market price, the supply curve, and the left-hand axis.
35
Q

For a linear supply curve, producer surplus can be calculated how?

A

½ × equilibrium quantity × (equilibrium price − price at which quantity supplied is zero).

36
Q

For a linear demand curve, consumer surplus can be calculated in which two ways?

A
  1. The area of the triangle, or
  2. ½ × equilibrium quantity × (price at which quantity demanded is zero − equilibrium price).
37
Q

What is elasticity?

A

The ratio of the percentage change in one variable to a percentage change in another.

38
Q

What is the equation for own price elasticity?

A
39
Q

What is the equation for own price elasticity?

A
40
Q

What is the equation for income elasticity?

A
41
Q

What can be infered from the following?

own price elasticity > 1

A

Demand is elastic.

42
Q

What can be infered from the following?

own price elasticity < 1

A

Demand is inelastic

43
Q

What can be inferred from the following?

cross price elasticity > 0

A

Related good is a substitute

44
Q

What can be inferred from the following?

cross price elasticity < 0

A

Related good is a complement

45
Q

What can be inferred from the following?

income elasticity < 0

A

Good is an inferior good

46
Q

What can be inferred from the following?

income elasticity > 0

A

Good is a normal good

47
Q

What is inelastic demand?

A
  1. When supply and demand for a good are unaffected when the price of that good or service changes.
  2. Ex: A lifesaving drug that people will purchase no matter the cost.
48
Q

What is elastic demand?

A
  1. When supply and demand for a good or service can vary significantly due to the price.
  2. Ex: the airline industry is very elastic because all airlines offer a very similar service.
49
Q

What is a substitute good?

A
  1. A product or service that satisfies the need of a consumer that another product or service fulfills.
  2. When a good’s price increases, the demand for its substitute will increase because consumers will go looking for a cheaper alternative.
  3. Ex: Coke and Pepsi
50
Q

What is a complimentary good?

A
  1. A good or service that is used in conjunction with another good or service.
  2. In an economic sense, when the price of a good rises, the demand for its complement will fall because consumers don’t want to use the complement alone.
  3. Ex: Socks & Shoes, Cars & Fuel, Hotdogs & Buns, etc.

2. CFA Economics (9 decks)

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