Module 3 Flashcards
What is demand in economics?
Demand is the amount of a good or service consumers are willing and able to purchase at each price.
What is supply in economics?
Supply is the amount of a good or service producers are willing to provide at each price.
What is the law of demand?
The law of demand states that, holding other variables constant, as price increases, quantity demanded decreases, and vice versa.
What is the law of supply?
The law of supply states that, assuming all other factors are constant, an increase in price results in an increase in quantity supplied, and vice versa.
What is equilibrium in the context of supply and demand?
Equilibrium is the price and quantity point where the quantity demanded equals the quantity supplied, and there is no pressure to change the price or quantity.
What is a demand curve?
A demand curve is a graphical representation of the relationship between price and quantity demanded, typically sloping downward from left to right.
What is a supply curve?
A supply curve is a graphical illustration showing the relationship between price and quantity supplied, typically sloping upward from left to right.
What factors can cause a shift in the demand curve?
Factors include changes in income, tastes and preferences, population composition, prices of substitutes or complements, and expectations about the future.
What factors can cause a shift in the supply curve?
Factors include changes in natural conditions, input prices, technology, and government policies like taxes or subsidies.
What is meant by ‘ceteris paribus’?
Ceteris paribus is a Latin phrase meaning “other things being equal,” used to isolate the impact of one variable while assuming other factors remain constant.
How does an increase in consumer income affect the demand for normal goods?
An increase in consumer income causes the demand curve for normal goods to shift to the right, indicating increased demand at every price.
How does an increase in input prices affect the supply of a product?
An increase in input prices raises production costs, leading to a leftward shift in the supply curve, indicating decreased supply at each price.
What happens when the price is above the equilibrium price?
When the price is above equilibrium, quantity supplied exceeds quantity demanded, creating a surplus, which puts downward pressure on the price.
What happens when the price is below the equilibrium price?
When the price is below equilibrium, quantity demanded exceeds quantity supplied, creating a shortage, which puts upward pressure on the price.
What are the steps in the four-step process to determine changes in equilibrium?
Draw the initial demand and supply model.
Determine whether the change affects demand or supply.
Determine the direction of the shift.
Identify the new equilibrium price and quantity.
What effect does a price ceiling have on the market?
A price ceiling set below the equilibrium price increases quantity demanded and decreases quantity supplied, creating a shortage.
What effect does a price floor have on the market?
A price floor set above the equilibrium price decreases quantity demanded and increases quantity supplied, creating a surplus.
What is consumer surplus?
Consumer surplus is the extra benefit consumers receive, measured as the difference between what they are willing to pay and what they actually pay.
What is producer surplus?
Producer surplus is the extra benefit producers receive, measured as the difference between the price they receive and the minimum they are willing to accept.
What is total surplus?
Total surplus, or social surplus, is the sum of consumer surplus and producer surplus, representing the overall benefit to society from market transactions.
