Supply and Demand Flashcards
What is a Market?
an institution that enables buyers and sellers to interact
eg.a lemonade stand, the internet
What is the “price system?”
when buyers and sellers exchange money for goods and services, they are communicating their individual desires, therefore, prices give us useful information for both consumers and sellers, this is why our market economy is called the “price system”
What is a persons “Willingness-to-pay?
the most an individual is willing and able to pay for a good/service (shows how much they value it)
What is “demand?”
the quantities of goods and services people are willing and able to pay
What is the “Law of Demand?”
As price increases, quantity demanded falls, and as price decreases, quantity demanded rises
What is the “Substitution effect?”
As the price of a good falls, consumers will buy more of this gpd instead of alternative goods that are now more expensive
What is the “Income Effect?”
As the price of a good falls, less money is spent on that good, freeing up money to spend on more of that good or other goods
What’s the difference between Giffen goods and Veblen goods?
Giffen goods are important staples to a financially struggling consumer (like rice) and Veblen goods are products where if the price increases, the demand for it will increase because a higher price is a symbol for wealth (like limited edition hand bags)
What does a “demand curve” show?
both the willingness to pay for a good and the given quantity of a good at any given price
In a Demand Schedule, it shows the quantities consumers are willing and able to purchase at any given price (think of the market for gaming apps example). How do we find the ‘Market Price?”
The Market price is a combination of all the consumers WTP price (the sum of all individual demands)
also called horizontal summation
What are the 5 determinants of demand??
1) Tastes and Preferences
2) Income
3) Prices of Related goods
4) The numbers of buyers
5) Expectations about future prices, Incomes, and Product availability
Whats the difference between normal goods and inferior goods?
Normal goods are goods that increases in demand as income increases (like expensive clothes/gadgets)
Inferior goods are goods that decline in demand as income rises (like discounted clothing)
Give an example for “Substitutes” and “Complements”
Substitutes = margine and butter
Compliments = movies and popcorn
What is the difference between a demand curve shifting and a change in quantity demanded?
Demand curve shifting = when one or more of the determinants changes, it shifts either to the left or right
A change in quantity demanded results in a shift ALONG the demand curve (like when the price of a product rise and consumers buy fewer of it)
What is “Supply?”
the maximum amount of a product that producers are willing and able to offer for sale at various prices
What is the Law of Supply?
Higher prices will lead producers to offer a larger quantity of their products, and if prices fall producers will offer a smaller quantity of products
(higher prices = potential for higher profit)
What does a Supply curve show?
A supply curve shows the maximum amounts of a product a producer will provide at various prices
What are the 6 determinants of demand
1) production technology
2) costs of resources
3) prices of related commodities
4) expectations
5) the number of sellers
6) taxes and subsides
What is the difference between a “change in supply” and a “change in quantity supplied”
A change in supply results from a change in one or more of the determinants. A change in quantity supplied woven result from a change in price, and it would move along the curve
What is it called when product demanded is equal to the quantity supplied?
Market equilibrium
What’s the difference between excess supply (surplus) and a shortage?
A surplus occurs when sellers are willing to supply more than what consumers are willing to buy (when the price is too high). A shortage occurs when the price is set too low (buyers will buy more than what sellers are providing)
When would a market be in equilibrium?
When the amount of a product that consumers are willing to buy is matched exactly by the amount that producers are willing to sell
Markets work by encouraging buyers and sellers to _______ ____ _______ until the equilibrium is reached
React to prices
When does a shortage occur?
When the price is set too low
