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.
What is deadweight loss
Deadweight loss is the reduction in social surplus resulting from producing less than or more than the efficient quantity in a market.
How does a reduction in tariffs on imported goods affect the supply curve?
A reduction in tariffs reduces production costs, causing a rightward shift in the supply curve, leading to lower equilibrium prices and higher equilibrium quantities.
How does a government-imposed price ceiling on gasoline affect the market?
A price ceiling set below the equilibrium price creates a shortage because the quantity demanded exceeds the quantity supplied at that price. Consumers want more gasoline at the lower price, but producers are not willing to supply as much, leading to unmet demand and potential rationing
What factors cause movement along the demand curve?
Movements along the demand curve are caused by changes in the price of the good itself, resulting in changes in quantity demanded, not demand
What factors cause movement along the supply curve?
Movements along the supply curve are caused by changes in the price received by producers, leading to changes in quantity supplied, not supply
What is the role of substitutes and complements in demand shifts?
Substitutes are goods that can replace each other, so a price increase in one leads to an increase in demand for the other. Complements are goods used together, so a price increase in one decreases demand for the other
How does a change in population composition affect demand?
Changes in population composition, such as aging or growth, can shift demand curves. For example, a larger elderly population increases demand for healthcare services, shifting the demand curve to the right
How does government intervention affect equilibrium?
Government interventions, like taxes, subsidies, price floors, and price ceilings, can prevent markets from reaching equilibrium, often leading to inefficiencies like shortages, surpluses, or deadweight loss
Why is economic efficiency important in the context of total surplus?
Economic efficiency is achieved when total surplus (consumer + producer surplus) is maximized, meaning no additional gains can be made without making someone worse off
How do natural disasters affect supply?
Natural disasters often disrupt production, shifting the supply curve to the left, leading to higher prices and lower quantities supplied.
What is elasticity in economics?
Elasticity measures the responsiveness of one variable to changes in another variable, typically related to price or income changes
What is price elasticity of demand?
It is the percentage change in the quantity demanded of a good or service divided by the percentage change in its price
What is price elasticity of supply?
It is the percentage change in the quantity supplied divided by the percentage change in price
What is the Midpoint Method for calculating elasticity?
It is a formula that uses the average percent change in both quantity and price to calculate elasticity, ensuring consistent results regardless of direction
What is elastic demand?
Demand is elastic when the elasticity value is greater than 1, indicating high responsiveness to price changes
What is inelastic demand?
Demand is inelastic when the elasticity value is less than 1, indicating low responsiveness to price changes
What is unitary elasticity?
Unitary elasticity occurs when the percentage change in quantity is equal to the percentage change in price, resulting in an elasticity value of 1
What is perfect elasticity?
Perfect elasticity is when quantity changes infinitely in response to any price change; represented by a horizontal demand or supply curve
What is perfect inelasticity?
Perfect inelasticity occurs when quantity does not change at all in response to price changes, represented by a vertical demand or supply curve
How is elasticity along a linear demand curve characterized?
Elasticity varies along a linear demand curve, being elastic at higher prices and lower quantities, and inelastic at lower prices and higher quantities
How does demand elasticity affect total revenue?
If demand is elastic, total revenue decreases when prices rise.
If demand is inelastic, total revenue increases when prices rise.
If demand is unitary elastic, total revenue remains unchanged when prices change
How does elasticity affect tax incidence?
If demand is more inelastic than supply, consumers bear most of the tax burden.
If supply is more inelastic than demand, producers bear most of the tax burden
What is the income elasticity of demand?
It measures the percentage change in quantity demanded in response to a percentage change in income
What is cross-price elasticity of demand?
It measures the percentage change in the quantity demanded of one good in response to a percentage change in the price of another good (substitute or complement)
How does short-run elasticity compare to long-run elasticity?
Elasticities are typically lower in the short run, as consumers and producers have less time to adjust, but they are higher in the long run as adjustments become easier
What is the significance of elasticity in pricing strategies for businesses?
Elasticity helps firms determine how much they can change prices to maximize total revenue without losing too many customers
Why is a demand curve with constant unit elasticity concave?
It is concave because the absolute value of declines in price decreases progressively along the curve, resulting in a steeper slope on the left and a flatter slope on the right
How does perfect inelasticity affect the impact of excise taxes?
In a market with perfectly inelastic demand, consumers bear the entire tax burden, with no change in quantity
What does an income elasticity greater than 1 imply about a good?
It implies that the good is a luxury, as demand for it increases more than proportionally as income rises
How do you calculate price elasticity of demand using the Midpoint Method?
Price Elasticity of Demand =
PercentageChangeinQuantityDemanded/
PercentageChangeinPrice
