Principles of Microeconomics, Chapter 4, 5, and 6 Flashcards
Difference between “change in demand” and “change in quantity demanded”?
If quantity demanded changes, the demand moves along the current demand curve. A change in demand, shifts the entire demand curve.
A change in the price of a related good changes demand or quantity demanded?
Demand
A change in tastes changes demand or quantity demanded?
Demand
A change in the number of buyers changes demand or quantity demanded?
Demand
A change in the price changes demand or quantity demanded?
Quantity demanded
A change in consumer expectations changes demand or quantity demanded?
Demand
A change in income changes demand or quantity demanded?
Demand
What is the difference between “change in supply” and “change in quantity supplied”?
Change in quantity supplied moves a point along the existing supply curve. Change in supply moves the entire curve.
A change in input costs changes supply or quantity supplied?
supply
A change in the producer expectations changes supply or quantity supplied?
supply
A change in the price changes supply or quantity supplied?
quantity supplied
A change in technology changes supply or quantity supplied?
supply
A change in the number of sellers changes supply or quantity supplied?
supply
Supply and Demand refer to
The behavior of people as they interact with one another in competitive markets.
A Market is
a group of buyers and sellers of a particular good or service.
As a group, buyers
determine the demand for the product.
Sellers, as a group
determine the supply of the product
Example of a Highly Organized market
Agricultural commodities
Example of a Less Organized market
Ice cream in a certain town
Competitive market is
market with many buyers and many sellers
Price and Quantity are determined by
all buyers and sellers as they interact in the marketplace.
Perfectly competitive market
goods offered for sale are all exactly the same.
Do individual buyer and sellers have influence over the market price?
No, they are too numerous
Quantity demanded
the amount of a good that buyers are willing and able to purchase
Law of demand
the claim that, all things being equal, the quantity demanded of a good falls when the price of that good rises.
demand schedule
a table that shows the relationship between the price of a good and the quantity demanded
demand curve
a graph of the relationship between the price of a good and the quantity demanded
Shift in demand curve to the right is
an increase in demand
Shift in demand curve to the left is
a decrease in demand
Normal Good
a good for which, all things being equal, an increase in income leads to an increase in demand
Inferior good
a good for which, all things being equal, and increase in income leads to a decrease in demand
Substitute goods
two goods for which an increase in the price of one leads to in increase of demand for the other.
Complementary goods
two goods for which an increase in the price of one leads to the decrease in demand for the other.
Quantity supplied
the amount of a good that sellers are willing and able to sell
Law of Supply
the claim that, all things being equal, the quantity of a good supplied rise when the price of that good rises
Supply schedule
a table that shows the relationship between the price of a good and the quantity supplied.
Supply curve
a graph of the relationship between the price of a good and the quantity supplied
Equilibrium
a situation in which the market price has reached the level at which the quantity supplied equals the quantity demanded
Equilibrium price
the price that balances the quantity supplied and the quantity demanded
equilibrium quantity
the quantity supplied and the quantity demanded at the equilibrium price
Surplus
a situation in which the quantity supplied is greater than the quantity demanded
Shortage
a situation in which the quantity demanded is greater than the quantity supplied
law of supply and demand
the claim that the price of any good adjusts to bring the quantity supplied and the quantity demand for that good into balance
Elasticity
The measure of the responsiveness of quantity demanded or quantity supplied to a change in one of it’s determinants
Price elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in the price of that good,
Price Elasticity of Demand =
% change in Q demanded / % change in Price
Necessities have _____ demands
inelastic
Luxuries have ______ demands
elastic
Midpoint method equation
(P2-P1)/[(P2+P1)/2]
Demand is considered inelastic when
Elasticity is less than 1
Unit Elasticity is
when elasticity is exactly 1
Demand is considered perfectly inelastic when
demand curve is vertical. zero elasticity. regardless of price, the quantity demanded stays the same.
Demand is perfectly elastic when
demand curve is horizontal. Small changes in price lead to huge changes in quantity demanded
Inelastic curves look like
the letter “I”
Total revenue
the amount paid by buyers and received by sellers of a good, computed as Price x Quantity sold
Slope =
Rise Change in P
——— = ——————
Run Change in Q
Income elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in consumer’ income
Cross-price elasticity of demand
Measure of how much the quantity demanded of one good responds to change in the price of another good.
Price Elasticity of supply
Measure of how much the quantity supplied of a good responds to change in price of that good
Price Ceiling
Legal maximum on the price at which a good can be sold
Price Floor
Legal minimum on the price at which a good can be sold
If the equilibrium price is below the price ceiling, the price ceiling is
not binding
Binding constraint is
when the equilibrium price is above the price ceiling.
When the government imposes a binding constraint on a competitive market, a
shortage of the good arises. Sellers must ration scarce goods among a large # of potential buyers
Tax incidence
the manner in which the burden of a tax is shared among participants in a market; buyers, sellers, producers..
Monopoly
only one seller in the market. They set the price
Market demand
sum of all individual demands for a good or service
Market demand curve
sum of the individual demand curves, horizontally
Increase in demand
Change that increases the quantity demanded at every price and shifts the demand curve to the right
Decrease in demand
Change that decrease the quantity demanded at every price and shifts the demand curve to the left
Market Supply
sum of the supplies of all sellers for a good or service
Market supply curve
sum of individual supply curves, horizontally
Increase in supply
change that increases the quantity supplied at every price and shifts supply curve to the right
Decrease in supply
change that decreases the quantity supplied at every price and shifts the supply curve to the left
Supply and demand together
determine the prices of the economy’s many goods and services
Prices
Signals that guide the allocation of resources.
Mechanism for rationing scarce goods.
Determine who produces each good and amount produced.
What does the price elasticity of demand measure
How much the quantity demanded responds to the change in price
Demand is said to be elastic if buyers respond_____ to changes in _____.
Substantially
Price
Demand is said to be inelastic if Q demanded changes only _____ when the _______ of the good changes
Slightly
Price
T/F: The demand for flat screen monitors is more elastic than the demand for monitors in general
True
T/F: The demand for grandfather clocks is more elastic than demand for clocks in general
True
The demand for cardboard is more elastic over a long period than a short period
True
Price elasticity of demand is computed as
the percentage change in the quantity demanded divided by the percentage change in price.
How is Price elasticity of supply computed
% Change in Price
How is cross-price elasticity of demand computed
% Change in P of 2nd Good
How is income elasticity of demand computed
% Change in Income
