IB Demand + Supply Flashcards
Define the equilibrium price/market-clearing price
price at which quantity demanded = quantity supplied
Define marginal costs (2)
additional cost of producing a unit of output
change in total cost/change in output
Describe signaling function of prices (2)
shortages and surpluses will provide signals to consumers + firms on state of market
resources will be reallocated due to changes in price
Define total utility
total satisfaction consumers get from consuming things
Define consumer surplus (2)
highest price individuals would be able to pay - price consumers actually pay
area under demand curve above equilibrium price
Define marginal product
additional output produced by one additional unit of a variable input
Name non-price determinants of supply (8)
cost of FOPs
technology
prices of substitute (competitive supply)
price of complement (joint supply - 2 or more products derived from production of single product)
firm price expectations
taxes + subsidies
no. of firms
supply-side shocks
Define community surplus
consumer + producer surplus
Define marginal utility
extra satisfaction consumers receive from consuming one more unit of a good
Define utility in economics
satisfaction consumers gain from consuming something
Define marginal costs (4)
extra cost from each additional input added
marginal cost increases as QTY increases
producers will only produce extra units if price increases
can be displayed as supply curve
Define short run (2)
time period when a FOP’s quantity or quality cannot be changed
short run if firm has at least one fixed input
Define social surplus/total surplus (2)
sum of consumer surplus and producer surplus
social surplus is largest at equilibrium quantity + price than any other quantity
Free goods in terms of quantity demanded and supplied
quantity supplied > quantity demanded when prices is 0
Define the vertical supply curve (3)
quantity supplied will not be influenced by price + remains constant
fixed quantity of good supplied as there is no time to produce more of it
fixed quantity of good as there is no way of producing more of it
Allocation between marginal cost and marginal benefits (3)
MB = MC : society is allocating the right amount to the good + producing quantity most desired by society
MB > MC : society places more value on the last unit of good produced than the cost to produce it –> should produce more
MB < MC : costs more for society to produce last unit of good than value placed on it –> should produce less
Define individual supply
quantities at which a firm is willing/able to produce a good at any given in a certain time period
Define long run (2)
time period when all FOP’s quantity or quality can be changed
all FOP’s are variable
Define supply-side shocks
sudden unpredictable events which can affect supply
Define rationing (3)
controlled distribution of resources
necessary when goods + resources are scarce
price is usually the best rationing function
Define excess supply (surplus)
quantity supplied > quantity demanded
Name non-price determinants of demand (4)
Income (in the case of normal goods + inferior goods)
preferences/tastes
prices of substitutes + complements
Number of consumers
Define the law of diminishing returns
output of each unit decreases as firm increases n.o of unit in short term
Features of market disequilibrium (2)
quantity demanded not = to quantity supply - excess demand or excess supply
temporary - forces of demand + supply cause price to change until market reaches equilibrium
Define price mechanism
how supply and demand interact to determine prices
Define the income effect (2)
decrease in price increases consumer’s purchasing power/real income
quantity demanded increases as you can buy more goods
Define competitive market equilibrium (2)
where quantity demanded = quantity supplied
there is no tendency for the price to change due to competition
Define market equilibrium (2)
point where supply curve of a good/service crosses the demand curve
state of balance - 2 opposing forces equally matched
Define marginal benefit (4)
extra benefit you get from each additional unit that you buy
marginal benefit decreases as QTY increases
so the price the consumer is willing to pay also decreases as QTY increases
can be displayed as demand curve
Define the law of diminishing marginal utility (2)
as consumption increases, marginal utility decreases
consumers will buy additional units only if the price falls
Define allocative efficiency (3)
producing the quantity of goods most wanted by society
economy allocates its resources for consumers to get most utility
answers what + how much to produce
Define the law of diminishing marginal returns (2)
marginal product increases when more units of a variable input are added to a fixed input
up till a certain point where marginal product begins to decrease
Explain the law of supply (2)
firm will be willing/able to supply if price is enough to cover costs
firms can only produce more output if price is able to cover cost of extra unit produced
Explain the relationship between law of diminishing marginal return and law of marginal costs (4)
each worker produces more output at low output levels
as a result, cost of producing each additional unit of output falls
at high output levels each worker produces less output
as a result, cost of producing each extra unit increases
Describe incentive function of prices (2)
firms + consumers motivated by incentives fueled by profit or utility
incentives change how firms + consumers behave
Define market demand (2)
total quantities in market for goods consumers are willing/able to buy at any price
sum of individual demand for a good
Define excess demand (shortage)
quantity demanded > quantity supply
Explain producer expectations as a factor of supply (2)
firms may withhold current supply if they expect prices to rise so they may sell at higher prices
firms may increase current supply if they expect prices to fall so they can sell at current higher price
Define the law of marginal costs (2)
marginal costs decrease as each additional unit of output is produced
untill a certain point where marginal costs begin to increase
Justification for government intervention in allocative efficiency (4)
- markets are not efficient in real world so require gov. interv.
inefficiency cause welfare/deadweight loss
- competitive markets cannot answer “for whom to produce” question
gov. help to distribute goods
Define producer surplus (2)
price received by firms for selling their product - lowest price they are willing to accept to produce good
area above supply curve under equilibrium price
Define market supply (2)
total quantities firms are willing/able to supply in market at any given price
sum of all individual supplies of a good
Define the substitution effect
price increases –> consumer buys more of the substitute good –> decreases quantity demanded
Relationship between law of diminishing marginal return and the law of marginal costs (2)
marginal product increase = marginal cost decrease
marginal product maximum when marginal cost minimum
