Demand and Supply (Weeks 5-6) Flashcards
The quantity demanded of a good for any given price
Demand curve
Law that states other things being equal, the demand of g1 increases when the price of g1 decreases (negative relationship)
Law of Demand
What is the exception to the Law of Demand?
Giffen good
When the demand of g1 decreases when the price of g1 decreases
Inferior good
As price increases, demand increases
Giffen good
When the demand of g1 increases when the price decreases
Normal good
True or false: A giffen good is an inferior good
True
What drives the substitution effect?
Change in the relative prices of the goods
What drives the income effect?
Change in purchasing power of buyer
If two goods are perfect substitutes and the price of y decreases, how are the quantities demanded of y and x affected?
Quantity demanded of y increases and quantity demanded of x decreases
Only substitution effects, no income effects
If two goods are perfect compliments and the price of y decreases, how are the quantities of y and x affected?
Quantity of y increases and quantity of x increases because there are only income effects, not substitution effects
Amount of the good that buyers are willing (preference) and able (budget) to purchase
Quantity demanded
The maximum amount that a buyer will pay for a good
Willingness To Pay (WTP)
What does Willingness To Pay (WTP) measure?
How much that buyer values the good
What does each point on the demand curve represent?
Consumer’s willingness to pay for that quantity (or marginal benefit)
Graphically, what represents a consumer’s willingness to pay?
The height of the demand curve
Also called marginal benefit
Shows the quantity supplied of a good or service at each market price
Supply curve
Is the supply or demand curve the outcome of utility maximization by individuals?
Demand curve
Is the supply or demand curve the outcome of profit maximization by firms?
Supply curve
Impact of a one-unit change in an input on the firm’s output, holding other inputs constant
Marginal productivity of that input
What is the equation for marginal cost?
Wage rate * amount of labor needed to produce one more unit
The difference between revenues and costs
Profit
Condition when the revenue from the next unit (marginal revenue) equals cost of producing the next unit (marginal cost)
Profit maximization
What factors shift demand along the demand curve? Is there a positive or negative relationship between price and demand?
Price of the good itself
Negative relationship between price and demand
What three factors shift the demand curve?
- Income
- Price of related goods
- Preferences (tastes) or other shocks
How does income shift demand? Compare normal and inferior goods
If it is a normal good, positive relationship between income and demand–demand curve shifts right when income increases
If it is an inferior good, negative relationship between income and demand–demand curve shifts left when income increases
How does the price of related goods shift demand? Compare substitutes and complements
If two goods are substitutes, the demand for one good increases as the price of the other good increases (substitute away from more expensive good); positive relationship
If two goods are complements, the demand for one good decreases as the price of the other good increases (because you need them together); negative relationship
How do changes in preference or shocks shift demand?
Can shift demand left or right it depends
Amount that sellers are willing and able to sell, holding constant other factors that influence firms’ supply decisions
Quantity supplied
Which law states that other things being equal, the supply of a good increases when the price of good increases (positive relationship)
Law of supply
The quantity supplied of a good at each market price
Supply curve
The increase in total cost that arises from an extra unit of production
Marginal cost
What is the height of the supply curve?
Marginal cost
What factors create movement along the supply curve? Positive or negative relationship between price and supply?
The price of the good itself
Positive relationship between price and supply
What two factors shift supply?
- Price of inputs
- Conditions of production
What are the four conditions of production that shift supply?
Government policies
Technology
Expectations
Weather
Does the price of inputs have a negative or positive effect on supply?
When the price increases, supply decreases (negative effect)
What does each point on the supply curve represent?
The marginal cost of producing a unit of a good
The sum of the quantity each consumer demands at that price
Market demand, also called total quantity demanded
The sum of the quantity each supplier produced at that price
Market supply, also called the total quantity supplied
Which type of goods are aggregated horizontally?
Private goods
What is the protocol for deriving the demand curve?
To derive the demand curve, we change the price of one good and analyze how the optimal consumption bundle changes. As the price of goods changes, the budget line pivots, and the consumer’s optimal bundle moves along different indifference curves.
What shows the quantity demanded at each possible price?
Demand curve
What are the x and y axes on a demand curve?
X: quantity demanded
Y: price of good
Shows the effect of all the relevant factors on the quantity demanded
Demand function
How do you aggregate demand?
Combine the demand from individual consumers at the same price
What are the x and y axes on a supply curve?
X: quantity supplied
Y: price of good
The limit a government sets on the quantity of a foreign-produced good that may be imported
Quota
Mathematically, how do you find the equilibrium point given an equation of a line for quantity demanded and an equation of a line for quantity supplied, both in terms of price
Set the two lines equal to each other (where Qs = Qd) and solve for the equilibrium price
Law that limits the number of firms that may sell goods in a market
Licensing law
True or false: the quantity supplied is the amount actually supplied by firms
False; it is the quantity that firms want to sell at a given price, not the amount supplied
True or false: the quantity demanded is the amount actually demanded by consumers
False; it is the quantity consumers are willing to buy at a given price
What are the four conditions of a perfectly competitive market?
- Everyone is a price taker
- Firms sell identical products
- Everyone has full information about the price and quality of goods
- Costs of trading are low
PPIC
What does it mean to be a price taker?
As a firm or consumer, you cannot affect the market price
This occurs when no consumer or firm is a very large part of the market and there is easy entry in and out of the market
What defies the idea of a price taker
Monopolies
What are the x and y axes of a demand curve?
y: price
X: quantity demanded
