Introduction, Supply and Demand Flashcards
Trade-Offs (society faces 3 key trade-offs)
- Which goods and services to produce: if society produces more cars, it must produce fewer of other goods and services because resources (workers, raw material, capital, energy) is limited
- How to produce: which raw materials to use to produce a good, depending on which is less expensive / quality
- Who gets the goods and services: the more of society’s goods & services you receive, the less someone else gets
Market
An exchange mechanism that allows buyers to trade with sellers
Single market: refers to a market for a single good or a group of goods, such as Fuji apples, soft drinks, movies, automobiles
Model
A description of the relationship between two or more economic variables
Strongly built on assumptions to simplify the model - e.g. assuming the consumers know the price each firm charges, or assuming the color of the car does not have an impact on the number of cars bought
Positive and Normative Statements
Positive Statement: a testable hypothesis about cause and effect - it indicates that the truth of te statement is testable
Normative statement (a value judgement): a conclusion as to whether something is good or bad - untestable because value judgement cannot be refuted by evidence
Normative statement is what someone believes Should happen, whereas a positive statement concerns what Will happen
Example: positive statement: if an African government use price control to keep price of food low during a drought, this will lead to food shortages and people will starve. A normative statement: because people should have prepared for the drought, the government should not try to help by keeping food prices low OR people should be protected against price gouging during a drought so the government should use price controls
How governments use microeconomic models
Predict the probable impact of a policy before it is adopted, such as effects of tariffs and quotas on trade
Competitive markets
Markets with many buyers and sellers, such as most agriculture markets, labor markets, stock and commodity markets
Supply-and-demand only works for competitive markets
Demand
The quantity of a good or service that consumers demand depends on price and other factors, such as consumers income and the price of related goods
Supply
The quantity of a good or service that firms supply depends on price and other factors, such as the cost of inputs firms use to produce the good or service
Market Equilibrium
The interaction between consumers’ demand and firms’ supply determines the market price and quantity of a good or service that is bought and sold
Shocking the Equilibrium
Changes in a factor that affect demand (e.g. changes in consumers’ incomes), supply (e.g. rise in price of raw materials), or a new government policy (e.g. a new sugar tax), will alter the market price and quantity of a good
Shifts in the demand curve or the supply curve cause the equilibrium to change
Effects of Government Interventions
Government policies may alter the equilibrium and cause the quantity supplied to differ from the quantity demanded
When to use the Supply-and-Demand Model
The supply-and-demand model applies only to competitive markets
Factors influencing demand (other than price)
Cause a SHIFT of the demand curve (price cause movement along the demand curve)
Consumers tastes - advertisement may influence people’s tastes
Information (or misinformation) about characteristics of a good (e.g. this good is healthy, this lowers cholesterol)
Price of other goods - substitures as well as complementary goods
Income - an increase in income might cause demand for DIY kits to decrease
Government rules and regulations - sales tax, usage bans
Quantity demanded
The amount of a good that consumers are willing to buy at a given price, holding constant the other factors that influence purchase
Demand curve
The quantity demanded at each possible price, holding constant the other factors that influence purchases
Law of Demand
Consumers demand more of a good the lower its price, holding constant other factors that influence consumption
Demand function
Q = D(p) and includes all the factors you do not want to hold constant - so if you want to incorporate the effect of the price of sugar, it could be Q = D(p, ps)
Factors influencing supply (other than price)
Cause a SHIFT in the supply curve (price cause movement along the supply curve)
Cost of production - when the cost of production falls, the firm supplies more, but if it exceeds what they can earn from selling the good, they sell nothing
Government rules and regulations - how much they want to sell, whether they may sell that product, such as taxes, polution, health insurance
Examples of government policies’ effects on supply curves
Licensing laws: limits the number of firms that may sell goods in a market, could be zoning laws limiting number of bars or hotel chains or licenses required in certain occupations where a tests must be passed, which limits the members of the occupation
Quotas: usually limit the amount of a good that firms may sell (not a limit on the number of firms) - often to limit imports.
Quantity supplied
The amount of a good that firms want to sell at a given price, holding constant other factors that influence firms’ supply decisions, such as costs and government actions
Supply curve
The quantity supplied at each possible price, holding constant the other factors that influence firms’ supply decisions
Supply function
Q = S(p) and includes all the factors you do not want to hold constant - so if you want to incorporate the effect of the price of cocoa, it could be Q = S(p, pc)
Equilibrium
A situation in which no one wants to change his or her behavior - where supply and demand meet.
Equilibrium price
The price at which the consumers can buy as much as they want and sellers can sell as much as they want
Also called the market clearing price, because it removes from the market all frustrated buyers and sellers (the market has no excess demand or excess supply)
