Lecture 4 Flashcards
What is equilibrium in the context of forces on an airplane?
Equilibrium is when all forces (lift, weight, thrust, drag) are balanced, resulting in the airplane holding a constant velocity and altitude.
How is the concept of equilibrium extended to stock prices?
In stock prices, equilibrium refers to the balance between buying and selling pressure, where the stock trades sideways, neither gaining nor losing significantly.
What will be explored in the notes on supply-demand equilibrium?
The notes will explore supply-demand equilibrium from the perspective of a consumer good and how these ideas apply to real-world situations.
What is the demand function equation in the provided example?
What happens to the price offered as quantity increases?
As quantity increases, the price offered falls, indicating that the market is becoming sated or saturated.
What is the supply function equation in the provided example?
What happens at the equilibrium quantity of 40?
At the equilibrium quantity of 40, the price offered by consumers ($40) equals the price demanded by producers ($40), balancing supply and demand.
What occurs when quantity is below the equilibrium level?
When quantity is below the equilibrium level, the price offered exceeds the price demanded, leading producers to increase production.
What occurs when quantity is above the equilibrium level?
When quantity is above the equilibrium level, the price offered is too low to meet the price demanded, causing producers to cut back on production.
How do you find equilibrium using the demand and supply equations?
Once the equilibrium quantity is known, how do you find the equilibrium price?
Substitute the equilibrium quantity back into either the demand or supply function.
What is an alternative method to finding equilibrium besides algebra?
Graphing the supply and demand curves to find the point where they intersect, which represents the equilibrium.
What is the crossing point in supply and demand functions?
The crossing point is where the supply and demand price curves intersect, representing the equilibrium for the two functions.
How can the graphical representation of equilibrium help?
It helps in understanding equilibrium and approximating new equilibrium points when supply or demand curves shift due to changes in economic conditions.
What can cause shifts in supply or demand curves?
Changes in consumer desire, new technology, resource shortages, or marketing efforts can shift the curves and perturb the equilibrium.
What does the crossing point of supply and demand functions represent?
It represents the equilibrium volume and price, where production is profitable, and consumption is beneficial.
What is consumer surplus?
Consumer surplus is the area between the equilibrium price and the demand curve, representing the benefit consumers receive from trade.
What is producer surplus?
Producer surplus is the area between the supply curve and the equilibrium price, representing the benefit producers receive from trade.
How is surplus divided between consumers and producers?
Surplus division depends on the relative trading power of each party, with either consumers or producers capturing more of the trade benefits.
Graph of Consumer/producer Surplus
Graph of Government Revenue and Deadweight Loss
What does the crossing point of supply and demand functions represent?
It represents the equilibrium volume and price, where production is profitable, and consumption is beneficial.
What is consumer surplus?
Consumer surplus is the area between the equilibrium price and the demand curve, representing the benefit consumers receive from trade.
What is producer surplus?
Producer surplus is the area between the supply curve and the equilibrium price, representing the benefit producers receive from trade.
How is surplus divided between consumers and producers?
Surplus division depends on the relative trading power of each party, with either consumers or producers capturing more of the trade benefits.
How can an equilibrium be perturbed?
An equilibrium can be perturbed by the introduction of a distortion, such as a tax, affecting the trade benefits.
What is the effect of a fixed price tax on surplus?
A fixed price tax reduces the equilibrium volume, creating a deadweight loss by reducing consumer and producer surplus and introducing government revenue.
What is deadweight loss?
Deadweight loss is the destruction of some trade gains due to a tax, where marginal benefits are reduced, and some trades do not occur, leading to an overall loss in welfare.
How does a tax affect the equilibrium volume?
A tax reduces the equilibrium volume as it creates a burden on trade, making it less beneficial for both consumers and producers.
How do you calculate the equilibrium price and quantity without distortion?
How does introducing a price cap affect equilibrium?
What happens to the sales volume if a fixed price tax of $2 per unit is imposed?
What are the government revenues from a $2 per unit tax?
How do you compute the deadweight loss from the implementation of a tax?
What is the formal definition of own price elasticity?
How do you calculate elasticity given the price and quantity changes?
