Semester 1 Flashcards
Demand Definition
The amount of a good/service that a consumer is willing and able to purchase at a given price in a given period of time.
As P increases, Q:
Decreases
Market Demand Definition
Combination of all the individual demand for a good/service.
DEMAND - Contraction VS Extension
C: P increase = Q decrease
E: P decrease = Q increase
Factors that change the demand from a good or price service
- changes in income
- changes in tastes/preferences
- substitutes
- changes in number of consumers
- future price expectations
Movement along the demand VS a shift in demand:
When price changes, there is a movement along the demand curve resulting in a change to the quantity demanded.
When a non-price determinant of demand changes, there isa shift of the entire demand curve resulting in a change to demand.
Supply definition
The amount of a good/service that a producer is willing to supply at a given price in a given time period.
When price rises, QS:
When price falls, QS:
Rises.
Falls.
Market supply definition
The combination of all the individual supply for a good/service.
How do you calculate the individual supply?
By adding up the individual supply at each price level.
SUPPLY - Extension VS Contraction
E: P increase = Qs increase
C: P decrease = Qs decrease
Factors affecting supply
- changes to costs of production
- changes to indirect taxes and subsidies
- changes to technology
- changes to the number of firms
- weather events
- future price expectations
- goods in joint and competitive industry
Effect of a subsidy on supply and demand:
- supply curve will shift to the right
- as a result there will be a movement along the demand curve
Market definition
Any place that brings buyers and sellers together.
When does equilibrium of a market occur?
When demand = supply
What is Qd > Qs
Excess Demand
What is the market response to disequilibrium in terms of getting rid of excess demand?
Sellers realize they can increase prices and generate more revenues and profits.
What’s Qs > Qd
Excess supply
What is the market response to disequilibrium in terms of getting rid of excess supply?
Sellers will gradually lower prices in order to generate more revenue.
If we want to ration a product, what do we do?
We increase the price so less people will buy it.
Incentive (not an IB definition)
Financial motives for people to take certain actions.
Functions of the price mechanism (not IB definition)
A system of signals that guide producers and consumers in their decisions, helping to balance supply and demand and achieve market equilibrium.
Examples of functions of the price mechanism:
- allocating resources
- signaling changes in supply and demand
- providing incentives to producers and consumers
Consumer surplus definition
The difference between the amount a consumer is willing to pay for a product and the price they have actually paid.
Producer surplus definition
The difference between the amount that the producer is willing to sell a product for and the price they actually do.
Where on a diagram do you find c+p surplus?
Consumer surplus above, producer surplus below.
Allocative efficiency
- where MB = MC (marginal benefit = marginal cost)
- resources are allocated so that consumers and producers get the maximum possible benefit
- there’s no excess demand or supply
Productive efficiency
- occurs at the level of output where average costs are minimized
- there’s no wastage of scarce resources
- high level of factor productivity
