Econ Ch 3 Flashcards
law of demand
there is an inverse (negative) relationship between the price of a good and the quantity that buyers are willing to purchase
Results in a downward sloping curve
why inverse relationship
price up,, buy less
price down, buy more
deriving the demand curve
be able to
what does the height represent of the demand curve
the max price that consumers are willing to pay for an additional unit
consumer surplus
the difference between the maximum amount consumers would be willing to pay and the amount that they actually pay
area below curve but above price
area of a triangle
willing to pay - cost
consumer surplus cannot be negative because
cost !> willingness because then no one will buy it
change in quantity demanded
a movement along the curve
what causes a change along the curve
a change in the current price of that good
increase in quantity demanded vs decrease in quantity demanded
increase- down the curve (to the right)
decrease - up the curve (to the left)
change in demand
a shift of the curve
what causes change in the shift of the curve
a change in anything that affects your desire to buy the good other than the current price of the good
increase vs decrease in demand
increase - curve shifts right
decrease - curve shifts left
shifters in demand
- change in consumer income
normal goods- income up, demand up
inferior foods - income up, demand down - change in number of consumers
consumers up, demand up - change in the price of a related good
substitutes - substitute increases, demand of other increases
compliments - price of one up, the demand of the other decreases - change in expectations
expected change in price- price to go up, current demand up
expected change in income- income to go up, current demand increases - change in consumer tastes and preferences
- taste and preference go up, demand goes up
law of supply
there is a direct (positive) relationship between the price of a good or service and the amount that suppliers are willing to produce
- as price increases, the quantity supplied increases
- mind of the seller
what does the height of the supply curve represent
the minimum price necessary to induce producers to supply that additional unit
producer surplus
the difference between the minimum price suppliers is willing to accept and the price they actually receive
pay - want
change in quantity supplied
a movement along the curve
what causes a change in a movement along the curve
a change in the current price of that good
increase in quantity supplied vs decrease in quantity supplied
increase - movement up the curve -right
decrease - movement down the curve - left
change in supply
a shift of the curve
what causes a shift of the curve
anything that affects your desire to produce and sell the good other than the current price of the good
increase in supply vs decrease in supply
increase - curve shifts right
decrease - curve shifts left
shifters of supply
- a change in resource price
price of resource up, supply less - a change in technology
more tech, more supply - changes in nature or politics
depends - changes in taxes
taxed more, do less, supply less
inelastic
change in quantity are not sensitive to change in price (inelastic curves are steeper)
elastic
change in quantity are sensitive to change in the price (elastic curves are flatter)
perfectly inelastic
not sensitive to change at all
vertical line
perfectly elastic
lots of substitutes
market equilibrium
A state in which the conflicting forces of supply and demand are in balance
Occurs when the demand curve intersects the supply curve
in market equilibrium…
All trades that generate more benefit than costs are undertaken
- before equilibrium
No trade where costs exceed benefits are undertaken
- after equilibrium
The combined area of consumer and producer surplus
efficient
no excess supply or excess demand
excess supply
quantity supplied > quantity demanded
to fix:
lower price and lower supply to go to equilibrium
excess demand
quantity demanded > quantity supplied
To fix: supply more and increase price
changes in demand to equilibrium
Demand changes:
Price - movies in the same direction
Quantity - movies in the same direction
Demand increases, pierce and quantity increases
changes in supply to equilibrium
Supply changes:
Price- moves in opposite direction
Quantity- moves in the same direction
Supply increases, price decreases, quantity increases
change to both demand and supply
Procedure for solving double shift questions:
Take it one statement at a time and ask yourself:
Does this affect supply or demand
Does it make it go up or down
What happens to price and quantity
Repeat steps a, b, and c for the 2nd statement
Add the effects together
- example on notes
invisible hand principle
The tendency for people, while pursuing their own interests, to promote the economic well-being of society
- prices communicate information
- prices coordinate the actions of market participants and motivate economics players
