Supply and Demand Flashcards
relationship between the price of a good and the amount firms are willing to sell of the good
supply curve
law of supply
as the price of a good goes up, people will want to sell more of it
factors that shift supply curve
- change in price of inputs (supply decreases at each price point)
- change in production technology (decrease in price, increase in production)
- change in number of sellers
- change in future expectations (future price of the good, future price of inputs)
when the price of a good is above the equilibrium price, a (blank) occurs
surplus (quantity demanded is less than quantity supplied)
market clearing price
when supply and demand are equal to each other
the absolute value of price elasticity of demand is inelastic/elastic when greater than 1
elastic
an increase in price of an elastic good correlates to a increase/decrease in revenue
decrease
an increase in price of an inelastic good correlates to a increase/decrease in revenue
increase
if income elasticity is greater than one, the good is elastic/inelastic
elastic
if increase in income correlates to an increase in quantity consumed the good is normal/inferior
normal
if increase in income correlates to a decrease in quantity (is less than zero) consumed the good is normal/inferior
inferior
the difference between the max you would pay for a good and what you actually paid
consumer surplus
consumer surplus on a price/quantity graph is located above/below the price paid and above/below the demand curve
above the price paid, below the demand curve
producer surplus on a price/quantity graph is located above/below the price paid and above/below the supply curve
below price paid, above the supply curve
total economic surplus formula
value to buyers - cost to sellers
goods will be allocated to the buyers who value them most highly and the sellers who can produce them at the lowest costs at
market equilibrium
the loss in surplus to society when there’s a distortion in the market due to inability to reach the equilibrium
point
Deadweight loss (ex: sales tax)
if the demand curve is relatively inelastic or more inelastic than
supply then the buyer/supplier has the bigger tax burden
buyer (larger difference in price paid and equilibrium price)
If the supply is relatively more inelastic than the demand curve then the buyer/supplier pays the bigger part of the tax burden.
supplier (larger difference in price received and equilibrium price)
the only price where the plans of consumers and the plans of producers agree—where the amount of the product consumers want to buy (quantity demanded) is equal to the amount producers want to sell (quantity supplied)
equilibrium price
any above-equilibrium price, the quantity supplied exceeds the quantity demanded, resulting in
excess supply / surplus
When the price is below equilibrium, there is
excess demand / shortage
ceteris paribus
“other things being equal.” Any given demand or supply curve is based on the ceteris paribus assumption that all else is held equal.
social (economic) surplus formula
consumer surplus + producer surplus
the percentage change in the
quantity demanded of a good or service divided by the percentage change in the price
price elasticity of demand
the percentage change in quantity supplied divided by the percentage change in price.
price elasticity of supply
% change in quantity formula
(q2-q1) / ((q2+q1)/2) * 100
% change in price formula
(p2-p1) / ((p2+p1)/2) * 100
price elasticity of supply or demand formula
% change in quantity / % change in price
the extreme case where either the quantity demanded (Qd) or supplied (Qs) changes by an infinite amount in response to any change in price at all
Infinite elasticity or perfect elasticity (horizontal demand curve)
the extreme case in which a percentage
change in price, no matter how large, results in zero change in quantity
Zero elasticity or perfect inelasticity (vertical demand curve)
the demand curve for a highly inelastic product will be more vertical/horizontal
vertical
the demand curve for a highly elastic product will be more vertical/horizontal
horizontal
Income elasticity of demand formula
% change in quantity demanded /
% change in income
Cross-price elasticity of demand formula
% change in Qd of good A /
% change in price of good B
when a given percent price change leads to an equal percentage change in quantity demanded or supplied
constant unitary elasticity
