Micro Econ 2 Flashcards
Supply and Demand Competition Markets
Law of Supply
-As price increases, quantity supplied increases.-
Shifters of Supply
- Number of Sellers: the amount of businesses that provide a product to the market
- Technology: new inventions make production easier-Resource Prices: includes everything from labor to resources to cost of shipping
- Taxes and Subsidies: Taxes make supply decrease and subsidies make supply increase. Taxes decrease supply because it costs the company more to produce the product. *Subsidies increase supply because the government gives money to the company in order to make cost of production less.
- Expectations of Producers: what sellers think will happen in the market
- Prices of Other Goods the Firm Could Produce: sometimes it is cheaper to produce another product than it is to produce the one that you currently are producing
Law of Demand
-As price decreases, quantity demanded increases.-The amount of a good or service that consumers are able and willing to buy at various possible prices during a specified time period.
Shifters of demand
- Change in taste and preferences-People might prefer PlayStation over Xbox and the demand for PlayStation would increase.
- Number of consumers-there is a larger demand when there are more consumers.
- Price of related goods-People aren’t going to buy tacos for $500 when they could buy burritos for $1.50. There will be a greater demand for the lower priced item. ( substitution and complementary)
- Income-When people have more money to spend, demand goes up.
- Future expectation-The demand for gas would go up if people expected prices to increase by a dollar in the next month.
***CHANGE IN PRICE DOES NOT SHIFT THE CURVE. IT ONLY CAUSES MOVEMENT ALONG THE CURVE***
Equilibrium point:
- Equilibrium price is the point of intersection on the supply/demand graph.
- Also called clearing point- people are demanding the same amount at the same price suppliers are willing to provide and sell.
Surplus
- Too many goods are being produced at high price. Above the equilibrium point
- Lower the prices because demand is low.
Shortage
- Too few goods are being produced at a low price, below the equilibrium
- Raise the price because the demand increases.
Why the Law of Demand Exists
- Law of diminishing marginal utility
as a person increases consumption of a product while keeping consumption of other products constant, there is a decline in the marginal utility that person derives from consuming each additional unit of that product.
- income effect
if prices rise and income does not- we cannot buy the same amount of goods
3.Substitution Effect
if price rises AND there is an option to buy a different but similar product we will
substitute goods
- goods used in place of one another.
- If the price of one increases, the demand for the other will increase (or vice versa)
complementary goods
- Complements are two goods that are bought and used together.
- If the price of one increase, the demand for the other will fall. (or vice versa)
inferior goods
- Your off name brands products/ cheaper goods
- As income increases, demand fallsAs income falls, demand increases
normal goods
- your more expensive luxury goods
- As income increases, demand increases
- As income falls, demand falls
elasticity
How consumer responds to changes in price
inelastic demand
-price changes has little impact on the quantity demanded by consumers-milk, gas, medicine etc.
elastic demand
- rise / fall in a product’s price greatly affects the amount that people are willing to buy-pop, airline tickets etc
