Lecture 3 Flashcards
What is the law of demand?
The inverse relationship between the quantity of a commodity and its price, given all other factors remain constant.
What does a downward sloping demand curve represent?
It shows that as the price of a good decreases, the quantity demanded increases, and vice versa.
What is the substitution effect in demand?
It refers to changes in the quantity demanded of a good due to its relative price compared to substitutes, without changes in absolute price.
What is the income effect in demand?
When the price of a good decreases, consumers’ purchasing power increases, allowing them to buy more with the same income.
How is the price effect calculated in demand?
Price Effect (PE) = Substitution Effect (SE) + Income Effect (IE).
What is the difference between a “change in quantity demanded” and a “change in demand”?
Change in quantity demanded is caused by price changes, while change in demand is caused by factors other than price, such as preferences or income.
What is supply in economics?
The quantity of a commodity that producers are willing to sell at different prices per unit of time.
What are the key determinants of supply?
The price of the commodity, cost of production, prices of other goods, state of technology, and goals of the producer.
How does technology affect supply?
Improvement in technology lowers production costs and increases output, shifting the supply curve to the right.
