Econ 101 Chp 3 Flashcards
When did economics start
1760s during the industrial revolution
Who made economics a science
adam smith
What causes the differences in wealth among nations
the power of the division of labour + free markets in raising labour productivity
Define a market in econ
a place where people sell items or offer services.
What’s a characteristic of most markets
unorganized collections of buyers + sellers
Define a competitive market + influence on the price
a narket that has many sellers and buyers - so no single buy or seller can influence the price
When do producers offer items for sale?
only if the priceis high enough to cover their oppourtunity cost
how do consumers respond to changing oppourtunity cost?
seeking cheaper alternatives to expensive items
Define Price of an object
number of dollars that must be given up in exchange for it
Define relative price
the ration of 1 price to another
How to calculate the relative price?
divide the money price of a good by the money price of a basket of goods + services (price index)
What determines relative prices?
the demand + suply model
Money price vs relative price
relative = ratio of the price with the price index
money = number of dollar given up for an exchange
If you demand something, then you
- want it
- can afford it
- plan to buy it
Define wants
unlimited desires or wishes that people have for goods + services.
What does demand reflect?
a decision about which wants to satisfy
Define quantity demanded
the amount that consumers plan to buy during a given time period at a particular price - a point on the demand curve
is the quantity demanded the same as quantity bought
can be different
Define the law of demand
ceterus paribus, the higher the price of a good, the smaller is the quantity demanded; the lower the price of a good, the greater is the quantity demanded
Why does higher price reduce the quantity demanded
- substitution effect
- Income effecte
Define the subsitituion effect
When the price of a good rises, ceteris paribus, its relative (oppourtunity cost) rises.
Substitutes (other goods that can be used in tis place).
as the opopourtunity cost of a good rises, the incentive to economize on its use + switch to a substitute becomes stronger
Define the income effect
when a price rises, ceteris paribus, the price rises relative to income - faced with a higher price + an unchanged income, people cannot afford to buy all the thing the previously brought. They must decreases quantity demanded of some goods + services.
Normally, the good of whose price has increase will be one of the foods that people buy less of.
Define demand
the entire relationship between the price of a good + the quantity demanded of that good
Define a demand curve
shows the relationship between quantity demanded of a good + its price, ceteris paribus.
define a demand schedule
lists the quantities demanded at each price when all other influences on consumers planned purchases remain the same
define a change in demand
when any other factor that influences buying plans changes, other than price of the good,
what are the factors that change demand?
- prices of related goods
- expected future prices
- income
- expected future income + credit
- population
- preferences
how does the prices of related goods change the demand curve?
when the price of 1 good increases, a related good can act as a substitute. thus the demand for the substitute will increase
Define a subsitute
a good that can be used in place of another good
Define a complement
a good that is used in conjuction with another good
How does expected future prices affect demand?
if they expected future prices of a good rises, and if the good can be stored, the oppourtunity cost of obtaining the good for future use is lower today than it will be in the future. thus today’s demand is higher and the future demand will decrease.
How does income change hte demand
when income increases, consumers buy more of most goods
define a normal good
demanded increases as income increases
inferior food
Define a inferior good
demand decreases as income increases
How does expected future income/credit change the demand curve?
when expected future income or credit increase, a demand for a good might increase now
How does population change demand
demand is depended on the size + age structure of the population. a larger population means larger demand for all goods + services.
how does preferences change demand
since preferences determines the value that people pace on each goods + services. preference depends on weather, info, fashion, etc,
What does it mean for a form to supply a good or service
- has resources + technology to produce
- can profit from producing it
- plans to produce it + sell it
What’s the role of resources + technology in the supply of a good or service
they are the constraints that limit what is possible
Define the quantity supplied of a good or service
the amount that producers plan to sell during a given time period at a particular price. - a point on the supply curve
Is quantity supplied the same as the quantity sold? all the time
no
Define the law of supply
ceteris paribus, the higher the price of a good, the grater the quantity supplied, the lower the price of a good, the smaller quantity supplied.
Why does the higher price increase quantity supplied?
marginal cost increases - as the quantity produced of any good increases, the marginal cost of producing the good increases
When a price of a good rises, ceteris paribus, why are producers wiling to incur a higher marginal cost?
to increase production. the higher price brings forth an increase in the quantity supplied.
Define supply
refers to the entire relationship between the price of a good + quantity supplied of it
define a supply curve
shows the relationship between the quantity supplied of a good and its price when all other influences on the producers’ planned sales remain the same
define a supply scheudle
lists the quantities supplied at each price when all the other influences on producers’ planned sales remain the same
what is the minimum supply price in relation to the supply curve and marginal cost?
a curve that shows the lowest price at which someone is willing to sell.
this lowest price is the marginal cost.
what are the factors that change supply?
- prices of factors of production
- prices of related goods produced
- expected future prices
- the number of suppliers
- technology
- the state of nature
how does the prices of factors of production change the supply?
as the factor of production rises, the lowest price that a producer is willing to accept for that good rises, so supply decreases
how does the prices of related goods produced change the supply?
complements in production
- goods that must be produced together
substitutes in production - goods that can be produced by using the same resources
how does expected future prices change supply
if the expected future price of a good rises, the return from selling the good in the future increases and is high than it is today - supply decreases today and increases in the future
how does the number of suppliers change the supply
as the number of firms that produce a good increases, the supply increases of the good
how does technology change the supply?
when there’s a technology change that lowers the cost of producing a good, there is more supply
how does the state of nature change the suply
good weather can increase supply while natural disasters can decrease supply
define state of nature
all natural forces that influence production, natural environment
define equilibrium
situation where opposing forces balance each other
when does equilibrium in a market occur
occurs when the price balances buying plans+ selling plans
define the equilibrium price
price at which the quantity demanded equals the quanityt supplied
define equilibrium quantity
the quantity bought + sold at the equilibrium price
why does a market move towards its equilibrium?
price regulates buying + selling plans
price adjusts when plans don’t match
what’s the relationship between price and short and price and surplus?
when there’s a shortage - price goes up
when there’s a surplus - price goes down
what’s equation of the demand curve when it is a straight line?
Price = a - b(quantity demanded)
- a and b are positive constants
what does this demand equation tell us?
- the price at which no one is wiling to buy the good (Qd is zero). if the price is equal to a (the y-intercept)
- as the price falls, the quantity demanded increases. If Qd is a positive number, then the price must be less than a. As Qd gets larger the price gets smaller.
- the constant b, tells us how fast the maximum price that someone is willing to pay for the good falls as quantity increases. equation tells that slope of the demand curve is -b.
what’s the equation of the supply line when it is a straight line?
Price = c + d(quantity supplied)
what does the supply equation tell us?
- the price at which sellers are not willing to supply the good (Qs is zero). if price equals to c (y-intercept)
- as price rises, the quantity supplied increases. if Qs is a positive number, then price must be greater than c, as Qs increases, the price becomes larger = as quantity increases the minimum price that sellers are to accept for the last unit rises
- the constant d tells us how fast the minimum price at which someone is willing to sell the good rises as the quantity increases - the equation tells us that the slope of the supply curve is d.
what’s the equation for equilibrium price
P* = a-bQ*
P* = c + dQ*
what’s the equation for equilibrium quantity
a-bQ* = c + dQ*
Q* = (a-c)/(b+d)
