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Public Policy Economics > Demand and Supply (Weeks 5-6) > Flashcards

Demand and Supply (Weeks 5-6) Flashcards

1
Q

The quantity demanded of a good for any given price

A

Demand curve

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2
Q

The percentage change in quantity demanded for each percentage change in prices

A

Elasticity of demand

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3
Q

What is the equation for elasticity of demand

A

Percentage change in price

Change in P/P

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4
Q

Other things being equal, the demand of g1 increases when the price of g1 decreases (negative relationship)

A

Law of Demand

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5
Q

What is the exception to the Law of Demand?

A

Giffen good

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6
Q

When the demand of g1 decreases when the price of g1 decreases

A

Giffen good

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7
Q

True or false: A giffen good is an inferior good

A

True

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8
Q

What drives the substitution effect?

A

Change in the relative prices of the goods

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9
Q

What drives the income effect?

A

Change in purchasing power of buyer

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10
Q

If two goods are perfect substitutions and the price of y decreases, how are the quantities of y and x affected?

A

Quantity of y increases and quantity of x decreases because there are only substitution effects, no income effects

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11
Q

If two goods are perfect compliments and the price of y decreases, how are the quantities of y and x affected?

A

Quantity of y increases and quantity of x increases because there are only income effects, not substitution effects

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12
Q

Amount of the good that buyers are willing (preference) and able (budget) to purchase

A

Quantity demanded

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13
Q

The maximum amount that a buyer will pay for a good

A

Willingness To Pay (WTP)

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14
Q

What does Willingness To Pay (WTP) measure?

A

How much that buyer values the good

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15
Q

What does each point on the demand curve represent?

A

Consumer’s willingness to pay for that quantity (or marginal benefit)

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16
Q

Graphically, what represents a consumer’s willingness to pay?

A

The height of the demand curve

Also called marginal benefit

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17
Q

Shows the quantity supplied of a good or service at each market price

A

Supply curve

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18
Q

Is the supply or demand curve the outcome of utility maximization by individuals?

A

Demand curve

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19
Q

Is the supply or demand curve the outcome of profit maximization by firms?

A

Supply curve

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20
Q

Impact of a one-unit change in an input on the firm’s output, holding other inputs constant

A

Marginal productivity of that input

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21
Q

What is the equation for marginal cost?

A

Wage rate * amount of labor needed to produce one more unit

22
Q

The difference between revenues and costs

23
Q

Condition when the revenue from the next unit (marginal revenue) equals cost of producing the next unit (marginal cost)

A

Profit maximization

24
Q

What factors influence demand? What type of movement is this? Positive or negative relationship between price and demand?

A

Price of the good itself

Movement along the demand curve

Negative relationship between price and demand

25
Q

What three factors shift demand? What type of movement is this?

A
  1. Income
  2. Price of related goods
  3. Preferences (tastes) or other shocks
26
Q

How does income shift demand? Compare normal and inferior goods

A

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

27
Q

How does the price of related goods shift demand? Compare substitutes and complements

A

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

28
Q

How do changes in preference or shocks shift demand?

A

Can shift demand left or right it depends

29
Q

Amount that sellers are willing and able to sell

A

Quantity supplied

30
Q

Other things being equal, the supply of a good when the price of good increases (positive relationship)

A

Law of supply

30
Q

The quantity supplied of a good at each market price

A

Supply curve

31
Q

The increase in total cost that arises from an extra unit of production

A

Marginal cost

32
Q

What is the height of the supply curve?

A

Marginal cost

33
Q

What factors influence supply? What type of movement is it? Positive or negative relationship between price and supply?

A

The price of the good itself

Movement along the supply curve

Positive relationship between price and supply

34
Q

What two factors shift supply?

A
  1. Price of inputs
  2. Conditions of production
35
Q

What are the four conditions of production that shift supply?

A

Technology
Expectations
Weather
Government policies

36
Q

Does the price of inputs have a negative or positive effect on supply?

A

When the price increases, supply decreases (negative effect)

37
Q

The benefit that consumers derive from consuming a good, above and beyond the price they paid for the good

A

Consumer surplus

38
Q

What is the graphical representation of consumer surplus?

A

The area below the demand curve and above the price at the equilibrium point

39
Q

What two factors determine consumer surplus?

A
  1. The market equilibrium point
  2. Elasticity of demand
40
Q

Quantity demanded is not very sensitive to prices

A

Inelastic demand

41
Q

Quantity demanded is very sensitive to prices

A

Elastic demand

42
Q

What is the relative steepness of the demand curve with very elastic demand? Inelastic?

A

Inelastic demand: very steep demand curve
Elastic demand: very flat demand curve

43
Q

True or false: as demand becomes more inelastic, consumer surplus rises

44
Q

True or false: as demand becomes more elastic, consumer surplus rises

A

False; as demand becomes more elastic, consumer surplus falls because the demand curve becomes flatter

45
Q

True or false: elastic demand arises from the availability of very good substitutes

46
Q

True or false: inelastic demand arises from the availability of very good substitutes

A

False; arrises due to a lack of substitutes (not sensitive to price because people with pay any amount)

47
Q

The benefit that producers derive from selling a good, above and beyond the cost of producing that good

A

Producer surplus

48
Q

What does each point on the supply curve represent?

A

The marginal cost of producing a unit of a good

49
Q

How is producer surplus represented graphically?

A

The area above the supply curve and below the equilibrium price

50
Q

The percentage change in supply for each percentage change in market prices

A

Price elasticity of supply

51
Q

What is the equation for price elasticity?

A

Percentage change in price

Change in P/P

Public Policy Economics (3 decks)

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