Supply and Demand Flashcards
How are prices determined in a market
Free from government intervention prices are determined by the interaction of market forces at the point where demand equals supply
What is equilibrium
The point where demand equals supply
What is equilibrium also know as
Market clearing price
What are the two types of disequilibirum
Surpluses
Shortages
What are shortages
When there is excess demand and prices are below the equilibrium
What are surpluses
When there is excess supply and the price is above equilbrium
What are the 4 supply and demand diagrams
Increase in demand
Increase in supply
Decrease in demand
Decrease in supply
What happens when there is an increase in demand
Increase in price and quantity traded
What happens when there is an increase in supply
Decrease in price
Increase in quantity traded
What happens when there is a decrease in demand
Decrease in price
Decrease in quantity traded
What would happen when there is a decrease in supply
Increase in price
Decrease in quantity demanded
What is producer surplus
It is the difference between the minimum price a producer would be willing and able to accept to supply a good/service and the actual market price they paid
How does a tax on the producer affect supply
The tax will raise the cost of production and make firms less willing and able so supply decreases
What is a specific or unit tax
The tax is the same regardless of the price of value of the product
What is a percentage or ad valorem tax
A tax based on the value of a good
What happens to supply after a subsidy
It increases
What are the two broad types of taxes
Indirect taxes
Direct Taxes
What are indirect taxes
They are taxes on production that are payable by firms
What are direct taxes
They alter the disposble income of buyers and will shift the demand curve
What is the incidence of a tax or subsidy
It is how much of the price change falls on the consumer
Who has the burden of the tax or subsidy
What happens to consumer incidence when demand is perfectly inelastic
The whole tax falls on the consumer
What happens when demand is perfectly elastic and a tax is applied
The producer has all the tax and the price doesn’t change
What does the incidence of a tax depend on
The elasticity of demand
The more inelastic the demand is, the higher the producer has to pay
What is the equation for tax revenue collected by the government
tax rate x number of units sold
What can the hypothesis of diminishing marginal utility be used to do
Explain why a demand cure is downward sloping
