Module 2: Pricing Flashcards
What determines the market price?
Demand from consumers, and supply from suppliers
What is demand and quantity demanded?
Demand refers to the schedule showing the quantities of a good that a consumer will buy at different prices. It is often represented numerically with a demand schedule (a table of price and quantity demanded). Quantity demanded refers to the quantity that a consumer will buy at a particular price, while demand refers to the whole price-quantity schedule. The concept of demand can also be represented graphically with a demand curve.
What are characteristics of the demand curve and how does it relate to the law of demand?
The demand curve is downward-sloping, which illustrates the negative relationship between price and quantity demanded. The relationship is stated in the law of demand: a decrease of price of a good will result in an increase in the quantity demanded and vice versa, holding other factors constant.
What is supply and what is quantity supplied?
Supply refers to a schedule showing the quantities of a good that a supplier will sell at different prices. It can be represented numerically with a supply schedule (table of price and quantity supplied). Quantity supplied refers to the quantity that a supplier will sell at a particular price, while supply refers to the whole price-quantity schedule.
What is the shape of a supply curve and how is it related to the law of supply?
Th supply curve is upward-sloping, which illustrates the positive relationship between price and quantity supplied. This relationship is stated in the law of supply: a decrease in price of a good will result in a decrease in its quantity supplied and vice versa, holding other factors constant.
What happens when the price is above or below the equilibrium level?
When price is above the equilibrium level, the quantity supplied if larger than the quantity demanded, which results in an excess of quantity supplied/surplus. The price tends to drop eventually.
When price is below the equilibrium level, the quantity demanded is larger than the quantity supplied, which results in an excess of demand/shortage. The price tends to rise eventually.
What is the equilibrium level and what happened when the price is at the level?
The equilibrium price is the price when the quantity supplied is equal to the quantity demanded. At the equilibrium level, sellers can sell all the quantities they are willing to supply at that price, and consumers can buy all the quantities they wish to buy at the price. At this price level, there is no tendency for the price to change.
How are the equilibrium price and quantities changed when demand is changed?
When demand changes, the whole demand curve is shifted right (increase) or left (decrease).
When demand is increased, the demand curve is shifted right. The equilibrium price will increase and the equilibrium quantity will increase.
When demand is decreased, the demand curve is shifted left. The equilibrium price will fall and the equilibrium quantity will fall.
What are some factors affecting demand?
Substitutes/in competitive demand, compliments/in joint demand, income, quality, population
How will the equilibrium level change when supply is changed?
When supply increases, the supply curve is shifted right. The equilibrium price will decrease while the equilibrium quantity will increase.
When supply decreases, the supply curve is shifted left. The equilibrium price will increase while the equilibrium quantity will decrease.
What are some factors affecting supply?
Prices of inputs, production technology, weather, number of suppliers.
