Supply and Demand Flashcards

Question

Inward vs. outward shift

Answer 1

Inward = left, outward = right

Answer 2

What is the relationship between beef and pork? They're substitutes As the price of beef goes up, people will want to shift towards pork So that's an outward demand shift for pork We start initially in equilibrium (e1), then suddenly people want more pork so the entire demand curve shifts out & we move along the supply curve For every price of pork, people want more But there is a constraint to how high producers can raise the price before demand falls away (at point e2 = new equilibrium, producers have higher price, consumers are okay with it & they are at equilibrium again)

Answer 3

Let's say there's a drought & the price of hogs rises – so the cost to producers has gone up Therefore, producers will raise prices – causing an inward shift to the supply curve (looks like it shifts up, when its really shifting left) At every quantity, the producers needs a higher price to justify higher input costs Causes excess demand, prices rise until a new equilibrium has been met This time, we move along the demand curve

Answer 4

A new equilibrium is found where the minimum wage intersects with the demand curve; the price rises (because the minimum wage is higher than the market equilibrium price) & then labor demanded falls (because firms can't afford to have as many workers). More workers want to work at this higher wage, so we're left with a market with excess supply = unemployment.

Answer 5

Nothing, because both consumers and producers are already happy where they are. There's no constraint/bind on either party.

Answer 6

In the 1970's – gas was really cheap, then OPEC formed (cartel) - and they got together and raised the price of gasoline in the 70's Before 1973, we're at equilibrium point e1 (low price, high quantity) Then, OPEC formed and decided to lower supply – so it raised the price (enough to overcome the quantity they lose by lowering supply); now we're at e2 So, the government implemented a gas ceiling to interfere with OPEC's impact.

Answer 7

Consumers are now ready to get gas (high demand) Gas stations can only sell a little bit of gas because they are still facing taxes from OPEC – so they lowered their supply. Suddenly, you have a massive excess demand.

Answer 8

Low efficiency – I would be willing to pay more to get more gas, the gas station would be willing to sell more gas at a higher price but because of the price ceiling, that can't happen - the 'size of the pie' is not getting maximized Allocation problems – when there's excess demand, who gets the gas? In the perfectly competitive equilibrium of e2, it's not an issue. People who are WTP at that market price get it & others don't. Since the market can't adjust to that equilibrium, so now... it's who has the time to sit there and wait in line to get gas. People are sitting there in line could be engaged in more productive activities. The pie is being shrunk – wasting time & gas Equity is also an issue - Poor people liked the lower prices, but again created massive inefficiencies. An example of an efficiency-equity tradeoff. Typically, if we want to distribute the pie differently then the pie will shrink (generally)

Answer 9

An efficient outcome is a outcome in which all trades that both parties want to make are made.

Answer 10

Inelastic demand – demand is not at all sensitive to price Demand curve is perfectly vertical; slope is 0. The quantity demand will be the same at any price

Answer 11

When the price rises, they'll sell the same quantity at a higher price. There's no wiggle/waggle - because consumers will just accept the higher price.

Answer 12

Consumers will buy the same of something no matter what because there's no substitute. Example: Insulin

Answer 13

Demand where people are willing to pay the given price; Very price sensitive If the price is raised by 1 cent more, they won't buy any of it. If the price is lowered by 1 cent less, they'll buy an infinite amount. Perfectly horizontal demand curve; slope is negative infinity.

Answer 14

Fast food restaurants - many substitutes; people are very price sensitive.

Answer 15

Percent change in quantity demanded over percent change in price, or change in Qd/Qd divided by change in P/P

Answer 16

When the price gets higher, consumers want less – how rapidly they want less is the shape of the demand curve

Answer 17

When the price goes up, how rapidly they want to supply more as price changes is the shape of the supply curve; it's positive (positive slope)

Answer 18

Who bears the burden of taxation? Statutory tax incidence - whoever pays the check bears the burden. If I pay my income tax, the tax is on me. If the gas station pays the gas tax, then the burden is on them

Answer 19

Whoever sends the check in is not necessarily the person who bears the burden of the tax because the market will adjust. The difference in somebody's resources before & after a tax is imposed

Answer 20

Because of the market reaction to a tax When a tax is imposed on producers in a competitive market, they'll raise their price to some extent - so their incidence will be lower than the check that they sent to the government. If a tax is levied on consumers, they'll buy less & the price will be lowered – so their incidence will be lower than the check that they sent to the government

Answer 21

Price post tax – price pre tax + tax payment (per unit)

Answer 22

Price pre tax – price post tax + tax payment (per unit)

Answer 23

a.k.a the "tax wedge"; includes consumer and producer tax burden. Generally, the tax burden is shared on both sides of the market regardless of who pays them.

Answer 24

Imagine the $0.50 is all on the consumers – you are bearing the tax totally. Well, the market will react. As a consumer, only WTP to $1.00 and my demand curve will shift inwards by $0.50. Producers will have to move up the supply curve – they'll have to cut the price to $1.30 and 90 billion gallons being sold Either way, if tax is levied on producers or consumers they still reach a quantity of 90 billion gallons. The burden on consumers vs. producers is the same burden as last time. CTB = $1.50 - $1.00 = -$0.30 burden PTB = $1.50 - $1.30 = -$0.20 burden

Answer 25

Stuck parties bear taxes; more slippery parties avoid taxes. If you're stuck, if you have to buy that insulin, you have to bear that tax. If you're slippery, if you can just go next door to someone else, then you likely won't bear the tax. Negotiating power As curves get more elastic, the incidence is going to be borne by the other party. As the demand curve gets more elastic, suppliers bear more incidence. As the supply curve gets more elastic, consumers bear more incidence.

Answer 26

The full burden is on the consumer. They can do this because demand isn't affected by changes in price

Answer 27

Producers have to bear the entire tax, but if they raise the price nobody will buy anything (very price sensitive)

Answer 28

Correlation – two variables move together vs. Causality - a change in one variable causes the other one to move

Answer 29

A shift of the supply curve causes movement of the equilibrium along the demand curve, which enables us to estimate the slope of the demand curve, and consequently the price elasticity of demand.

Answer 30

A shift of the demand curve causes movement of the equilibrium along the supply curve, which enables us to estimate the slope of the supply curve, and consequently the price elasticity of supply.

Answer 31

You can't. You have to isolate a shift in either the supply or the demand curve. A shift of both the demand and supply curves causes movement of the equilibrium of both original curves, which enables us to estimate neither the slope of the original demand curve nor the slope of the original supply curve, and consequently neither the price elasticity of demand nor the price elasticity of supply.

Answer 32

Microeconomics is about trade-offs, the study of scarcity, and constrained optimization. Economics is a quasi-science, not a real science because economic models do not perfectly explain real-world phenomena, they only approximate them.

Answer 33

Consumers maximize utility subject to budget constraints.

Answer 34

Producers maximize profits subject to marketplace constraints.

Answer 35

Unemployment

Answer 36

...as big as possible. Efficiency is about not preventing economic transactions from happening, thereby growing the size of the economy. This is like growing the pie. Dividing the pie equally is a concept analogous to equity.

Answer 37

No. If a price ceiling is nonbinding – that is, if a price ceiling is established above the equilibrium price – then the equilibrium will not change in response to the price ceiling.

Answer 38

In order for a price ceiling to be binding, it must be below the free-market equilibrium price. If the price ceiling were imposed above the free-market equilibrium price, the market would continue on as though nothing had happened.

Answer 39

Revealed preferences uses observations about the choices people make to estimate their underlying preferences. In this case, the amount people choose to pay for safety features reveals how much they value lowering their risk of death, and therefore how much they value death itself.

Answer 40

If a good has no substitutes, then consumers in the market for that good have no option but to buy it at whatever price it is offered.

Answer 41

measures the willingness of consumers to buy the good

Answer 42

measures the willingness of producers to sell the good

Answer 43

– shocks to the ability of producers to supply – shocks in consumer tastes – shocks to the price of complement/substitute goods. A rise in the price of a substitute good for good X raises the demand for the X.

Answer 44

– for example, imposing a minimum wage means that more people will want to work than employers want to hire at the minimum wage. This creates unemployment.

Answer 45

The cost of these interventions is found in reduced efficiency (trades that are not made); there may be benefits in greater equity.

Answer 46

If you're moving along the curve, it's due to a change in price. If you shift the demand curve, it means at any price, the demand is different - i.e. different input prices, changes in consumer preferences, changes in substitutable markets, etc.

Answer 47

Price of a Commodity - As already discussed, the movement in a demand curve occurs due to a simple change in the price of goods. This may usually occur because of the changes in supply conditions. The factors that affect the demand are assumed to be held constant. Therefore, a change in the price of a commodity leads to a movement along the demand curve and is referred to as a change in quantity demanded. Income of Consumers -If something happens to alter the quantity demanded at a given price, a shift in a demand curve occurs. Lower income means that a person has less to spend, so he is likely to spend less on most of the goods. Change in the level of income of the consumers causes a shift in the demand curve because their purchasing power overall changes. Expectation of Consumers - For example, if consumers will expect to earn higher income next month, they may be willing to spend more of their current savings purchasing the ice cream. Also, if they believe that the price of an ice cream would drop tomorrow; they will be reluctant to purchase it at today’s price. This ultimately causes a shift in the demand curve. Price of Related Goods - A change in the price of related goods affects the demand for a certain product and causes a demand curve to shift. There are two kinds of related goods, complementary and substitute goods. When the demand of one good reduces due to the fall in a price of another good, the two goods are known as substitutes. Whereas, when the demand for one good increases due to fall in a price of another good, the two goods are known as complements. If the price of Popsicle falls, the law of demand says that people will purchase more popsicles as compared to ice creams because they have the same characteristics and satisfy similar desires of consumers. Therefore, a change in the price of related goods causes a shift in the demand curve rather than a movement along the demand curve because this factor externally affects the demand curve. Consumer Preferences - The most obvious determinant of demand is the consumer preference and a change in a consumer preference causes a shift in the demand curve. If people like ice cream, they purchase more of it. With the passage of time, economists have become more interested in explaining consumer preferences and taste. The development in neuroscience has made it more evident as to why people make decisions and this has come into the realm of economics, which helps economists examine what happens when the preferences of consumers change. The Size of the Population and its Structure - A large population size, keeping other things equal, shows a higher demand for all goods and services. Therefore, more consumer base means there will be more consumption and more demand, which will externally affect the demand curve and hence, will cause it to shift. Moreover, changes in the way a consumer population is structured also leave an impact on the demand. For example, goods and services required by elderly in European countries, where there is more ageing population, will increase the demand of those goods and services as a result.

Answer 48

Leads to inefficient outcomes, market failure, etc.

Answer 49

The elasticity affects consumers’ response to a shift in price: if the elasticity is between 0 and -1, then firms can raise revenues by raising the price (since consumers will still buy the good in significant quantities); if elasticity < -1, then raising the price results in a decline in from revenue.

Answer 50

Accurately estimating an elasticity requires a shift along the supply curve (e.g., a tax on suppliers).

Answer 51

Perfectly inelastic demand is characteristic of a good with no substitutes; perfectly elastic demand is a good with perfect substitutes

Answer 52

Qd−Q1d=[(Q2d−Q1d)/(p2−p1)]*(p−p1)

Answer 53

% change in quantity/% change in price

Answer 54

R = p * q(p)

Answer 55

For revenues to remain unchanged when we change prices by x% , quantities must change by −x% (locally). ϵD=% change in quantity% change in price=−x%x%=−1

Answer 56

=-50/8=-6.25

Answer 57

Revenues are R=p⋅q(p) . When we raise prices, there are two forces opposing each other for revenues: higher prices will increase revenue but also detract the quantity demanded. Algebraically, dRdp=q+p⋅dqdp=q(1+ϵD) . For dRdp

Answer 58

negative infinity

Answer 59

In the short run, firms cannot adjust K , so they cannot choose the input mix this way.

Answer 60

This may or may not be true. Depending on the production function, production may be at a corner solution, and the firm may choose production to remain at the corner solution.

Answer 61

eventually increasing The law of diminishing marginal returns means that the marginal cost curve will eventually be increasing. However, at low levels of the input, there can be increasing marginal returns to an input, and MC may decrease at first.