Exam -1 Chapter 4 Supply And Demand Flashcards
What is the value a goods determined by
The interaction of supply and demand
Demand
Demand is the quantity of goods that consumers are willing and able to buy a given prices. We expect an inverse relationship between quantity demanded and price.
When does the demand shift
Demand is shifted by - changes in the price of other goods Income Number of consumers Taste
What do other goods include
Complements and substitutes
Supply
Supply is the quantity of goods that producers are willing and able to sell at a given price. We expect a direct relationship between quantity supplied and price.
When does supply change or shift
Supply is shifted by changes in- Cost of production alternative use of resources number of sellers technology
Both supply and demand increases by
Shifting rightward
Both supply and demand decreases by
Shifting leftward
The point where supply and demand cross is called
Equilibrium
A price higher than equilibrium price creates
A surplus of goods
A price below the equilibrium price creates
Shortage of goods
Some markets have price control such as
Price ceilings or
Floors
- these may leave a market in disequilibrium.
- if they are effective, they are said to be binding
Revenue equals
Price times quantity sold
What steps must be followed to solve any supply and demand problem
Determine which of supply and demand is affected
Determine if the curve will increase ( rightward shift)or decrease ( leftward shift)
Determine what happens to equilibrium price and quantity
Interpret the outcome
The price will be good in a market is determined by the
Interactions of buyers and sellers
Factors that influence buyers are referred to as
Demand
Factors that affect sellers are referred to as
Supply
Together demand and supply form the
Foundation of economics
Demand
Is the quantity of a good that consumers are willing and able to purchase at a given price
Law of demand
States that there should be an inverse relationship between price and the quantity demanded of any good. When the price of the good rises, the law of demand says that the quantity demanded of that good should fall and vice versa
What are the four factors that affect the level of demand?
Price of other goods -P Income - I number of consumers -N taste- T PINT
What two categories do other goods fall into
Substitutes and complements
Substitute
Is a good that can replace the good we are considering.
Example spaghetti might be a substitute for pizza
Close substitute
Goods that can easily replace other goods .
Example pepperoni pizza and sausage pizza might be close substitutes
Weak substitutes
Other goods are poor or weak substitutes.
Example Chinese food might be only a weak substitute for pizza
When does the demand for a good increase
When the price of the substitute increases.
When does the demand for a good fall
When the price of a substitute decreases
Complement
Is it good that goes with the original good.
Example jelly is a complement for peanut butter
Most goods are
Normal goods
The demand for a normal good increases as
Consumers income increases
Some goods are
Inferior goods
The demand for an inferior good decreases
As income increases
As the number of consumers rises
Demand increases
Taste
Reflects the likes and dislikes of consumers at that moment
Changes in taste can
Increase or decrease demand, depending on whether the change was positive or negative
How to make a demand graph
Price of goods goes on the Y or vertical axis
Quantity demanded of a goods goes on the X or horizontal axis
The demand curve will be a downward sloping line. This is because of the law of demand, which states that an inverse relationship between price and quantity demanded should exist.
If the demand curve moves to the left or right this is called
A change in demand
If the demand curve stays in the same location, but we move up or down it, that is called
A change in the quantity demanded
When we say that demand has increased that means
The curve itself has moved
A rightward shift is an
Increase in demand
What can be the causes of the shift from D1 to D2 ?
Increase in the price of substitute
Increase in income of consumers
Increase in the number of consumers
Taste could change
Supply
Is the quantity of a good that producers are willing and able to sell at a given price
Supply goes hand-in-hand with
Profit
Law of supply
States that there should be a direct relationship between price and the quantity supplied of any good. When the price of a good rises, The law of supply states that the quantity supplied of the good should rise and vice versa
What are the four factors that affect the level of supply
Cost -C alternative uses of resources -A number of sellers -N technology-T CANT
What are the four factors of production
Land labor capital and entrepreneurship
When the land labor and capital becomes more expensive, the profit of the entrepreneur
Will fall, ceteris paribus, and the entrepreneur will be less willing to sell her product at a given price
An increase in cost
Lowers profit and therefore supply
A decrease in cost
Increases profit, and therefore supply
Resources should move to the
Use that earns the greatest profit
As the number of sellers arises, the quantity of a good supplied
Will be greater at any price
Improvements in technology
Allow businesses to produce more goods with the same or fewer resources.
This makes the production of goods more profitable and increase the supply
How to make a supply graph
Price of goods goes on the Y or vertical axis
Quantity supplied of the good goes on the X or horizontal axis
The supply curve will be an upward sloping line. This is because of the law of supply, which states that a Direct relationship between price and quantity supplied should exist
If the supply curve moves to the left or right this is called
A change in supply
If the supply curve stays in the same location, but we move up or down it, that is called
A change in the quantity supplied
When we say supply has increased it means
The curve itself has moved
What can cause the shift from S1 to S2?
A decrease in the cost of the resources such as land labor and capital.
A change in resource use.
Increase in the number of sellers or technology
A rightward shift in supply is
Always an increase because the curve shifted , The more from point a to point B on the graph represents an increase in supply
In theory the demand curve is the
Summation of individual demands of all consumers
In theory the supply curve is the
Summation of the individual supply of all producers
Equilibrium
Is a position where Either no forces are acting on a system or equally balanced forces are acting
When does equilibrium occur
It occurs in markets at the point where the quantity of good that buyers wish to buy is exactly equal to the quantity of a good that sellers wish to sell
Point of equilibrium
Where supply and demand are equal that is , where they cross
As Supply and demand change so will the
Equilibrium price and quantity
Remember that both supply and demand increases
By moving to the right, and decrease by moving to the left
Markets can be
Out of equilibrium.
This is a short-term phenomenon that happens as one or both of supply and demand are shifting and the market is moving to a new position of equilibrium
When does a shortage occur
When quantity demanded exceeds quantity supplied
Price ceiling
Is a government imposed price control or limit on how high a price is charged for the product
What is the problem with the price ceiling
It takes away the incentive of producers to create more
Price ceilings are not
Always effective
Binding vs non binding price ceiling
A price ceiling is the legal maximum price that can be charged.
Binding- if price ceiling is below the equilibrium price
Nonbinding – if Bryce ceiling is above the equilibrium price
Price floor
Price floor -A price floor is the legal minimum price that can be charged.
Binding- if the price floor is above the equilibrium price
Nonbinding – if the price floor is Under the equilibrium price
The opposite of a shortage is
Surplus
When does a surplus occur
When quantity supplied exceeds quantity demanded
How to calculate surplus
Quantity supplied minus quantity demanded
Disequilibrium
When a market is out of equilibrium
When a market is out of equilibrium ( in disequilibrium)
There are natural forces that drive it towards equilibrium
Each market drives itself towards
Equilibrium and stability
Positive economics
Scientific or objective study of the allocation of resources
Revenue
The revenue of a business is the amount of money brought in from the sale of goods and services
Numerically revenue is defined as
Price times quantity
Revenue =Price x Quantity =PQ
When the demand increases, but the equilibrium price and quantity will
Increase
Supply and demand are
Isolated from each other. That is, a single change that affects one curve will never affect the other
Sometimes both demand and supply maybe moving at the same time, but it is because
Two separate changes according to Market, one that moved demand and another that moved supply
Changes in demand always lead to
Predictable Changes in revenue
Changes in supply cause
Unpredictable changes in revenue
Remember that quantity
Changes in opposite directions
Supply and demand is based on the existence of
Competitive markets
Quantity supplied
Number of units that sellers want to sell over a specified period of time
Quantity demanded
The amount of a good or service that consumers are willing and able to buy at a specific price
