Markets Flashcards
What is the model called where consumers and producers interact in the market for goods and services?
Supply and demand model
Define a market.
A specific product being bought and sold, in a particular location at a point in time
Whats the problem with defining markets so broadly?
It makes the assumptions of the supply and demand model less likely to hold
How many basic assumptions are there behind the supply and demand model?
4
Define supply.
The combined amount of a good that all producers in a market are willing to sell
Define demand.
The combined amount of a good that all consumer in a market are willing to buy
What are the four basic assumptions to the supply and demand model?
- ) We focus on supply and demand in a single market
- ) All goods sold in the market are identical
- ) All goods sold in the market sell for the same price, and everyone has the same information
- ) There are many producers and consumers in the market
What is another word for saying all goods sold in the market are identical?
The goods are homogeneous
What is the implication of all goods being identical in the supply and demand model?
A consumer is just as happy with any one unit of good
What is a commodity?
Products traded in markets in which consumers view different varieties of the good as essentially inter-changeble
What kind of product best reflect the assumption of: all goods sold in the market are identical?
Commodities
What is the implication of all goods in the market being sold for the same price?
There are no special deals for particular buyers and no quantity discounts
How does the supply and demand model ensure there are many identical buyers?
They assume there are no barriers of new firms entering the market so as long as there is demand there will be a firm there to supply
What are two categories of variables?
Exogenous and endogenous
What does exogenous mean?
Determined outside the model
What does endogenous mean?
Determined within the model
In the supply and demand model is input/output endogenous/exogenous?
Exogenous - input
Endogenous - output
In the supply demand model what is exogenous and what is endogenous?
Exogenous - demand curve, supply curve
Endogenous - market price, quantity of good exchanged
Name five factors that effect a consumers demand.
- ) Price
- ) The number of consumers
- ) Consumer income or wealth
- ) Consumer tastes
- ) Price of other goods
How does price of the good effect demand?
People will demand more of the good at a lower price
How does the number of consumers effect demand?
The more people in the market the greater the quantity of good desired
How does consumer income or wealth effect demand?
As a consumer becomes richer they will buy more of most goods
How does consumer taste effect demand?
A change in consumer preference will change the amount of a good they want to purchase
Name four things that effect consumer taste.
- ) News
- ) Popular advertising campaign
- ) Fads
- ) Changes in demographics
How do the prices of other goods effect demand?
When the price of a substitute good falls the consumer will want to buy more of it and less of the original good
Define a substitute good.
A good that can be used in place of another good.
Define a complement good.
A good that is purchased and used in combination with another good
How does the price of a complement good effect demand for the initial good?
If the price of a complement falls, consumers will want to but more of it and also more of the initial good
Do changes in the price of substitute and complement goods have the same effect?
No, opposite
Define what the demand curve is.
The relationship between the quantity of a good that is consumers demand and the good’s price, holding all other factors constant
Which way does the demand curve slope?
Downwards
Sketch a generic demand curve.
Picture
Why does the demand curve slope downwards?
The lower the price of the good the more consumers will be, a negative relationship
What is the generic equation for the demand curve?
Q = a - bP
What do Q and P stand for in Q = a - bP?
Quantity demanded and price
Define the demand choke price.
The price at which no consumer is willing to buy a good, so the quantity demanded is zero
What can you rearrange the demand curve to form?
The inverse demand curve
What is another name for the inverse demand curve?
The implicit demand curve
What is the generic equation for the inverse demand curve?
P = a/b - Q/b
Define the inverse demand curve.
A demand curve written in the form of price as a function of quantity demanded
What causes a shift in the demand curve?
When one of the other (nonprice) factors that affect demand changes, and so the consumer demands a different quantity at a given price so the whole demand curve moves.
When will the demand curve change its slope?
When the demand becomes more or less sensitive to price
Define a change in quantity demanded.
A movement along the demand curve that occurs as a result of a change in the good’s price
Whats the difference between a movement along the demand curve and a shift in the demand curve?
A movement along the demand curve happens when a good’s price changes but nothing else, the shift in the curve happens when the other factors that influence the demand curve changes
Define a change in demand.
A shift of the entire demand curve caused by a change in a determinant of demand other than the good’s own price
What is the difference between a change in the quantity demanded and a change in demand?
A change in quantity demanded is a movement along the fixed demand curve but a change in demand is a shift in the demand curve
Give three reasons why price is treated differently to the other factors.
- ) Price is the most important factor that influences demand
- ) Price can be changed frequently and easily
- ) Of all the factors that influence demand, price is the only one that also exerts a large, direct influence on the other side of the market
Name four factors the influence a producers supply.
- ) Price
- ) Supplier’s cost of production
- ) The number of sellers
- ) Seller’s outside options
How does price influence supply?
The higher the price a producer can get for a good the more they will supply
How does supplier’s cost of production influence supply?
The lower the supplier’s cost the higher the willingness to supply to the market
What two things can change a supplier’s production cost?
If the input prices or production technology changes
Define a production technology.
The processes used to make, distribute and sell goods
How does the number of sellers influence supply?
The more producers the more the available supply
How does the seller’s outside options influence supply?
If you can make more money selling your goods elsewhere or producing different goods then the supply will decrease
Define a supply curve.
The relationship between the quantity supplied of a good and the good’s price, holding all other factors constant.
Sketch a generic supply curve.
Picture
Which way does the supply curve slope?
Upwards
Why does the supply curve slope upwards?
The higher the price of a good the more the producer will want to supply, giving a positive relationship
What is the generic equation for the supply curve?
Q = c + dP
Define the supply choke price.
The price at which no firm is willing to produce a good and quantity supplied is zero
Define the inverse supply curve.
A supply curve written in the form of price as a function of quantity supplied
What can you rearrange the supply curve equation to get?
The inverse supply curve equation
How do the demand/supply choke price relate to the inverse demand/supply curve.
The vertical intercept of the curves
What causes a shift in the supply curve?
When one of the (nonprice) factors that affect supply changes
Define a change in quantity supplied.
A movement along the supply curve that occurs as a result of a change in the good’s price
Define a change in supply.
A shift in the entire supply curve caused by a change in a determinant of supply other than the good’s own price
Why are we able to draw the supply and demand curve on one axis?
Both relate price and quantities
Define market equilibrium.
The point at which the quantise demanded by consumers exactly equals the quantity supplied by producers
Define equilibrium price.
The only price at which quantity supplied equals quantity demanded
What symbols represent equilibrium price and quantity?
Pe, Qe
Draw the supply demand model.
Picture
How do you find the equilibrium price?
Equate the demand and supply curves and rearrange to get P equals, as we know QD = QS
How do you find equilibrium quantity?
Find the equilibrium price and then back substitute into either equation
When a market is in equilibrium what qualities to the quantity supplied and demanded have?
They are equal
Why is the equilibrium a stable position?
If the price is too high there will be excess supply, if the price is too low there will be excess demand, and so the price will alter to get rid of the this excess
What causes excess supply?
The price being too high
What causes excess demand?
The price being too low
How is the equilibrium in the market restored when the price is above the equilibrium price?
At prices above the equilibrium there is a surplus, supply exceeds demand, suppliers will sell excess stock at lower prices, so consumers will lower their offer prices reducing the price back to the equilibrium price
How is the equilibrium in the market restored when the price is too low?
At prices below the equilibrium there is a shortage, demand exceeds supply, consumers will offer higher prices. This means supply will increase and demand decrease until the price is back at the equilibrium price
Show an a supply demand model where there would be excess supply and where there would be excess demand
Picture.
How do demand shifts effect the equilibrium price and quantity?
A fall in demand shifts the curve to the left and so a reduce in the equilibrium price and quantity. Vice verse
How do supply shifts effect the equilibrium price and quantity?
An increase in demand shifts the curve to the right so a reduce in the equilibrium price and quantity. Vice verse
What is the difference between a change in demand and a change in the quantity demanded?
A change in demand shifts the whole curve where as a change int he quantity demanded causes a movement along the demand curve
Whats the effect of a demand curve shift to the right with a flatter supply curve?
Small increase in equilibrium price and a larger increase in equilbrium quantity
Whats the effect of a demand curve shift to the right with a steeper supply curve?
Small increase in equilibrium quantity and a larger increase in equilibrium price
Whats the effect of a supply curve shift to the right with a flatter demand curve?
Small decrease equilibrium price and a larger increase in equilibrium quantity
Whats the effect of a supply curve shift to the right with a steeper demand curve?
Large decrease in equilibrium price and small increase in equilibrium quantity
