ll Flashcards
What is Supply and Demand Analysis?
A powerful tool in economics for analyzing how market forces determine prices and output levels in competitive markets.
What is Quantity Demanded (Qd)?
The amount of a good or service consumers are willing and able to purchase during a given period.
Name the 6 factors included in most studies of market demand.
- Price of the goods or services (P)
- Income of the consumers (M)
- Price of related goods and services (Pr)
- Taste or preference patterns of the consumers (T)
- Expected price of the product in the future (Pe)
- Number of consumers in the market (N)
What is the relationship between price and quantity demanded when all other factors are held constant?
They are inversely related.
What are Normal Goods?
Goods for which an increase in income causes consumers to demand more.
What are Inferior Goods?
Goods for which an increase in income causes consumers to demand less.
What is a Substitute in consumption?
Two goods are substitutes if an increase in the price of one causes consumers to demand more of the other.
What is a Complement in consumption?
Two goods are complements if an increase in the price of one causes consumers to demand less of the other.
How can consumer expectations affect demand?
Expectations of higher future prices can increase current demand, while expectations of price declines can decrease current demand.
What happens to demand when the number of consumers in the market increases?
Demand for a good increases.
What does the Intercept Parameter ‘a’ in the demand function represent?
The value of Qd when all other variables are equal to zero.
What is a Direct Demand Function?
Shows the relation between quantity demanded and price when other variables are held constant.
What is a Demand Schedule?
A table showing a list of possible product prices and the corresponding quantities demanded.
What is a Demand Curve?
A graph showing the relation between quantity demanded and price when all other variables are held constant.
What is Demand Price?
The maximum price consumers will pay for a specific amount of a good or service.
What does the Law of Demand state?
Quantity demanded increases when price falls, and decreases when price rises, holding other factors constant.
What is a Change in Quantity Demanded?
A movement along a given demand curve that occurs when the price of the good changes.
What is an Increase in Demand?
A change in the demand function that causes an increase in quantity demanded at every price, reflected by a rightward shift in the demand curve.
What is a Decrease in Demand?
A change in the demand function that causes a decrease in quantity demanded at every price, reflected by a leftward shift in the demand curve.
What are Determinants of Demand?
Variables that change the quantity demanded at each price, determining the location of the demand curve.
What is Quantity Supplied (Qs)?
The amount of a good or service offered for sale during a given period.
Name the six major variables that affect quantity supplied.
- Price of the good itself (P)
- Prices of inputs used to produce the good (Pi)
- Prices of goods related to production (Pt)
- Level of available technology (T)
- Expectations of future price (Pe)
- Number of firms or productive capacity (F)
What are Substitutes in Production?
Goods for which an increase in the price of one good causes producers to increase production of that good and decrease production of another.
What are Complements in Production?
Goods for which an increase in the price of one good causes producers to increase production of both goods.
What is a General Supply Function?
Shows how all six variables jointly determine the quantity supplied.
What is a Supply Schedule?
A table showing a list of possible product prices and the corresponding quantities supplied.
What is a Supply Curve?
A graph showing the relation between quantity supplied and price when all other variables are held constant.
What is a Shift in Supply?
Occurs only when one of the determinants of supply changes value.
What is Elasticity?
A measure of responsiveness of one variable to a change in another variable.
What is Perfectly Inelastic demand?
When quantity demanded remains constant even when price changes (e = 0).
What is Inelastic demand?
When there is a slight change in quantity demanded as price changes (e < 1).
What is Elastic demand?
When there is a big change in quantity demanded as price changes (e > 1).
What is Perfectly Elastic demand?
When quantity demanded completely changes to 0 with any price change (e is undefined).
What is Unit Elastic demand?
When the change in demand is equivalent to the change in price (e = 1).
What is Price Elasticity of Demand?
The elasticity between price and quantity demanded.
What is Income Elasticity of Demand?
The elasticity between income and quantity demanded.
What is the formula for calculating % ΔQd?
(Q2 - Q1) / ((Q1 + Q2) / 2)
Q1 and Q2 are the quantity demanded at the two points.
What is the relationship between income and quantity demanded for normal goods?
Higher income raises quantity demanded
Quantity demanded and income move in the same direction.
What characterizes inferior goods in terms of income elasticity?
Higher income lowers the quantity demanded
Quantity demanded and income move in opposite directions.
Define Cross-Price Elasticity of Demand.
Elasticity between the SUBSTITUTE and QUANTITY DEMAND (Qd)
Measures how the quantity demanded of one good changes as the price of another good changes.
What does a positive cross-price elasticity indicate?
The price of good and the quantity of good demanded move in the same direction
Indicates substitutes.
What does a negative cross-price elasticity indicate?
The price of good and the quantity of good demanded move in opposite direction
Indicates complements.
What is Price Elasticity of Supply?
Elasticity between the PRICE (P) and QUANTITY SUPPLY (Qs)
Measures how much the quantity supplied of a good changes in response to a change in price.
What is the formula for calculating % ΔQs?
(Qs2 - Qs1) / ((P1 + P2) / 2)
Qs1 and Qs2 are the quantity supplied at the two points.
What is the relationship between Total Revenue and Total Cost?
Profit = Total Revenue - Total Cost
Total Revenue is price multiplied by quantity of outputs.
Define Explicit Cost.
Input costs that require a direct outlay of money
Includes cash payments for inputs.
Define Implicit Cost.
Costs that do not require outlay of money
Includes time, efforts, or depreciation.
What is the difference between Economic Profit and Accounting Profit?
Economic Profit is smaller than Accounting Profit
Economic Profit includes both explicit and implicit costs.
What is the Production Function?
Relationship of inputs and outputs of the goods.
Define Marginal Product.
Increase in output that arises from an additional unit of input.
What does Diminishing Marginal Product refer to?
Input declines as the quantity of input increases.
What is the formula for Total Cost?
Total Cost = Total FIXED Cost + Total Variable Cost.
Define Fixed Cost.
Costs that do not vary with the quantity of output produced.
Define Variable Cost.
Costs that do vary with the quantity of output produced.
What is Average Cost (AC)?
Cost of each typical unit of product, determined by dividing total costs by quantity of output.
What is Marginal Cost (MC)?
Increase in total costs that arises from producing an extra unit.
What shape is the Average Total Cost (ATC) curve?
U-shaped.
What is the Efficient Scale of the Firm?
The quantity that minimizes average total cost.
What are the three important properties of cost curves?
- Marginal Cost eventually rises with the quantity of output
- ATC curve is U-shaped
- MC crosses ATC at the minimum or efficient scale of the firm.
What is the effect of Economies of Scale?
Long-run ATC falls as the quantity of output increases.
What is the effect of Diseconomies of Scale?
Long-run ATC rises as the quantity of output increases.
What is Constant Return to Scale?
Long-run ATC stays the same as the quantity of output increases.
