Macroeconomics - Ch 3 Flashcards
Demand
Schedule or curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time (other things equal)
Demand Schedule/curve
Graph showing price and quantity’s inverse relationship (as price declines, people buy more); downward slope reflects law of demand
Law of demand
Inverse relationship between price and quantity demand
Diminishing marginal utility
Consumption subject to this; successive units of a particular product yield less and less marginal utility; consumers will only buy additional units if the price is progressively reduced
Income Effect
A lower price increases the purchasing power of a buyer’s money income, enabling the buyer to purchase more of the product than before; higher price has the opposite effect
Substitution Effect
At a lower price, buyers have the incentive to substitute what is now a less expensive product for other products that are now relatively more expensive (product whose price has fallen is now a better deal relative to other products)
Determinants of demand (demand shifters)
Factors affecting purchases other than price these = other things equal; when determinants change, curve shifts to the left or right; basic ones: (1) Consumers’ tastes/preferences (2) # of buyers in the market (3) consumers’ incomes (4) prices of related goods (5) consumer expectations
Normal goods (superior goods)
Products whose demand varies directly with money income; most products fall into this category
Inferior goods
Goods whose demand varies inversely with money income
Substitute Good (substitutes in consumption)
One that can be used in place of another good
Complementary Good (complements)
One that is used together with another good
Independent Goods
Vast majority of goods that are not related to one another; change in the price of one has little or no effect on the demand for the other
Increase in demand
Due to favorable change in consumer tastes, increase in # of buyers, rising incomes (normal goods), falling incomes (inferior goods), increase in the price of a substitute good, decrease in the price of a complementary good, new consumer expectation that either prices or income will be higher in the future; reverse these to explain decrease in demand
Change in Quantity Demanded
Movement from one point to another point (from one price-quantity combo to another) on a fixed demand curve; cause = increase/decrease in price
Supply
Schedule/curve showing the various amounts of a product that producers are willing/able to make available for sale at each of a series of possible prices during a specific period; supply schedule tells us (other things equal) firms will produce and offer for sale more of their product at a high price than at a low price (price represents revenue)
Law of Supply
As price rises, the quantity supplied rises; as price falls, the quantity supplied falls
Marginal cost
The added cost of producing one more unit of output
Supply curve
Upward slope reflecting the law of supply; positive/direct relationship between price & quantity
Determinants of Supply (supply shifters)
(1) Resource prices (2) Technology (3) Taxes & Subsidies (4) Prices of other goods (5) Producer expectations (6) # of sellers in the market; change in one of these shifts the entire curve right or left
Change in supply
Change in the schedule, shift of the curve
Change in quantity supplied
Movement from one point to another on a fixed supply curve
Equilibrium price (market-clearing price)
Price where the intentions of buyers and sellers match (quantity demanded = quantity supplied)
Equilibrium quantity
Quantity at which the intentions of buyers and sellers match
In equilibrium
a market in balance, or at rest
Surplus
Excess supply; drives prices down
Shortage
Excess demand; drives prices up
Productive Efficiency
the production of any particular good in the least costly way
Allocative Efficency
the particular mix of goods and services most highly valued by society (minimum-cost production assumed)
MB=MC
Marginal benefit = marginal cost at the intersection of the demand and supply curves (allocative efficiency results)
Price ceiling
sets the maximum legal price a seller may charge for a product or service (ex. rent control, usury laws- limits rent, interest)
Black markets
product illegally bought/sold above legal limits
Price floor
minimum price fixed by the government; invoked when society feels the free functioning of the market system has not provided a sufficient income for certain groups of resource suppliers or producers (Ex. agricultural products, minimum wages)
Increase in demand ______ equilibrium price and quantity; a decrease in demand ______ equilibrium price and quantity
Increases; decreases
Increase in supply ______ equilibrium price but ______ equilibrium quantity; a decrease in supply ______ equilibrium price but _______ equilibrium quantity
reduces; increases
increases; reduces
