Demand, Supply, Market Equilibrium, and Welfare Analysis Flashcards
Law of Demand
holding all else equal, when the price of a good rises, consumers decrease their quantity demanded for that good
ceteris paribus
a Latin phrase literally translated as “with other things the same” or “all other things held equal/constant”; it is an assumption made that no variables are changing other than the two being addressed
absolute/money prices
the price of a god measured in units of currency
relative prices
the number of units of any other good Y that must be sacrificed to acquire the first good X; only relative prices matter
substitution effect
the change in quantity demanded resulting from a change in the price of one good relative to the price of other goods
income effect
the change in quantity demanded that results from a change in the consumer’s purchasing power (or real income)
demand schedule
a table showing quantity demanded for a good at various prices
demand curve
a graphical depiction of the demand schedule; the demand curve is downward sloping, the inverse of the Law of Demand
determinants of demand
the external variables that shift demand to the left or right; they include:
- consumer income
- the price of a substitute good
- the price of a complementary good
- consumer tastes and preferences
- consumer expectations about future prices
- number of buyers in the market
normal goods
goods for which higher income increases demand
inferior goods
goods for which higher income decreases demand
substitute goods
two goods are consumer substitutes if they provide essentially the same utility to the consumer; a Honda Accord and a Toyota Camry might be substitutes for each other for many people
complementary goods
goods that provide more utility consumed with an original good when consumed together than both do when they are consumed separately; a 35mm camera and a roll of film are complementary goods
Law of Supply
holding all else equal, when the price of a good rises, suppliers increase their quantity supplied for that good
supply schedule
a table showing quantity supplied for a good at various prices
supply curve
a graphical depiction of the supply schedule; the supply curve is upward sloping, reflecting the Law of Supply
determinants of supply
the external variables that influence supply; when these variables change, the entire supply curve shifts to the left or right; they include:
- the cost of an input for production (any economic resource)
- taxes or subsidies
- producer expectations about future prices
- the prices of other goods in the market, especially similar ones
- the number of competitors
market equilibrium
exists at the only price where the quantity supplied equals the quantity demanded; or, it is the only quantity where the price consumers are willing to pay is exactly the price the producers are willing to accept
shortage
also known as excess demand, a shortage exists at a market price when the quantity demanded exceeds the quantity supplied; the price rises to eliminate a shortage
disequilibrium
any price where the quantity demanded is not equal to the quantity supplied
surplus
also known as excess supply, a surplus exists at a market price when the quantity supplied exceeds the quantity demanded; the price falls to eliminate a surplus
total welfare
the sum of the consumer surplus and producer surplus; the free market equilibrium provides maximum combined gain to society
consumer surplus
the difference between your willingness to pay and the price you actually pay; it is the area below the demand curve and above the price
producer surplus
the difference between the price received and the marginal cost of producing the good; it is the area above the supply curve and under the price
