Econ 101: Chapter 4 Flashcards
Planned economy
centralized decisions are made about what is produced, how, by whom, and who gets what
e.g. Cuba, the USSR
Market economy
each individual makes their own production and consumption decisions, buying and selling in markets
e.g. North America, Europe
Market
a setting bringing together potential buyers and sellers.
Different types of markets…
- ones have posted prices
- others are auctions
- some are financial market (traders buy and sell stock).
Equilibrium
the point where there is no tendency for change.
Markets are in equilibrium when…
quantity supplied equals quantity demanded.
Equilibrium price
the price at which the market is at equilibrium.
Equilibrium quantity
the quantity demanded and supplied in equilibrium.
Market equilibrium is…
determined in equal measure by both supply and demand.
Shortage
when the quantity demanded exceeds the quantity supplied.
Surplus
when the quantity demanded is less than the quantity supplied.
Shortages lead to a…
rise in price (shortages occur when the price is below equilibrium)
Surpluses lead to a…
fall in price (surpluses occur when the price is above equilibrium).
Disequilibrium
symptoms of a market out of equilibrium – raises the “effective price”
- also can see that same thing when there is a surplus – lowers the effective price.
Disequilibrium type 1:
Queuing: waiting for a spot in line. Raises price as you are now spending time.
Disequilibrium type 2:
Bundling of extras: buying something extra so you can get what you were after in the first place.
Disequilibrium type 3:
Secondary market: buying from somewhere that is not the “official” market.
Shifts in demand (causes)
PEPTIC.
Increases in demand:
rightward curve shift – buy a larger quantity at each price.
New supply-demand equilibrium with increased price and quantity.
Increases of demand (sellers):
sellers do not want to continue to supply at the old equilibrium price.
No price change would mean a shortage, so the price is driven up, providing incentive for the seller to supply more.
Decrease in demand:
leftward curve shift – buy a smaller quantity at each price.
New supply-demand equilibrium at a decreased price and quantity.
Decrease in demand (sellers)
Decrease in demand means that a surplus would result.
Prospect of a surplus drives price down, incentivizing sellers to supply less.
Demand shifts causes
price and quantity to move in the same direction.
Shifts in supply (cause)
I, POET
Increase in supply:
rightward curve shift – increases the quantity sellers plan to sell at each price.
New supply-demand equilibrium at a increased quantity and decreased price.
Increase in supply (buyers)
Sellers want to continue to sell at the old price, but buyers don’t demand any more.
This prospect of a surplus leads price to drop, incentivizing buyers to increase the quantity they demand.
Decrease in supply:
leftward curve shift, decreases the quantity suppliers plan to sell at each price.
New supply-demand equilibrium at a decreased quantity and increased price.
Decrease in supply (buyers)
Decreased supply would mean a shortage. This prospect drives price up.
This higher price incentivizes buyers to decrease the quantity they demand.
Supply shifts cause
price and quantity to move in opposite directions.
To predict market outcomes:
- Is supply or demand curve shifting (or both).
- Right shift or left shift?
- How do prices and quantities compare at the new equilibrium?
Anything that changes marginal benefits for buyers…
shifts the demand curve.
Anything that changes marginal costs for sellers…
shifts the supply curve.
Increase in marginal benefits…
= increase in demand
Increase in marginal costs…
= decrease in supply
When both supply and demand curves shift…
look at each shift separately and add up the effects.
The effect of two curve shifts…
depend on which curve shifts the most.
Morning-evening method
think about the demand as shifting in the morning.
think about the supply as shifting in the evening.
Market clearing
when supply equals demand
