Lecture 2 (Supply&Demand) Flashcards
Assumption when discussing supply and demand:
perfect competition
Demand depends on:
-price,
-preferences,
-budget,
-other products,
-expectations
Supply depends on:
-price,
-input price,
-other goods,
-technology,
-expectations
ceteris paribus meaning
all else equal (on demand curve all factors that affect demand are constant)
Demand schedule
table of quantity of demand with diferent prices
Demand and inverse demand functions
Demand function - Qd(p);
Inverse demand function - P(Qd)
Normal good meaning
when income increases demand increases
Inferior good meaning
when income increases, demand decreases
Substitutes meaning
if the price of good Y increases, the demand for good X increases (Iphone - X, Samsung - Y)
Complements
if the price of good Y increases, the demand for good X also increases (PC monitor - X, PC - Y)
Surplus meaning
(Excess supply) - more supplied than there is demand
Shortage meaning
(Excess demand) more demand than there is supplied
Consumer surplus meaning
Money saved as willingless to pay was higher than actual price (consumer surplus = Willingless to pay -Actual price)
Total consumer surplus meaning
Consumer surplus of all people (it’s the sum of area between the price and the demand curve
Producer surplus meaning
difference between the price and the cost
total surplus (total welfare) meaning
Area between demand and supply (CS+PS)
price controls meaning
way for government to intervene in markets
Price control can be achieved by:
-Price ceilings
-Price floors
-quota
-taxes
-subsidies
Deadweight loss meaning
surplus that is lost
Economic signal meaning
any piece of information that helps people make better economic decisions
When markets fall short of efficiency?
- Attempt to capture more surplus, one party prevents mutually beneficial trades from occuring
- Side effects of actions of individuals on welfare of others that markets don’t take into account
- Goods, by their very nature, were unsuited for efficient management by markets
Wedge meaning
the difference between what customers pay and suppliers receive [atotrūkis]
Quota rent meaning
Earnings that are received by the license-holder from ownership of a valuable commodity, the license
Side effects of quantity controls
- Deadweight loss (some mutually beneficial transactions don’t occur)
- Incentives for illegal activities
Binding price floor/ceiling meaning
Price floor/ceiling which exceedes and goes past the equilibrium
Non-binding price floor/ceiling meaning
Price floor/ceiling which is too low to go past equilibrium
