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MIT DEDP Microeconomics 14.100x > Supply and Demand > Flashcards

Supply and Demand Flashcards

1
Q

Microeconomics

A

Microeconomics is the study of how individual firms and consumers make themselves as well off as possible in a world of scarcity and what those decisions mean for markets and the economy as a whole.

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2
Q

Trade-Offs

A

There are three trade-offs that society faces:

  1. What should be produced - based on the available resources - workers, capital, material, energy
  2. How to produce a certain output level - firms decide what inputs to use based on the outcome it’ll allow them to achieve (alternating the use of palm oil and coconut oil based on their respective price)
  3. Who gets the goods/services is based on constrains and resources of consumers given there is not an indefinite supply of goods/services
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3
Q

Prices

A

Prices link the relationship between the three trade-off questions society faces: what to produce, how to produce it, and who gets it. Prices influence the decisions consumers and firms make, and the interactions between consumers, firms, and the government influence prices

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4
Q

Market

A

A market is an exchange mechanism that allows buyers to trade with sellers.

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5
Q

Model

A

Models are used to predict the future or answer questions about how a change affects various sectors of the economy. In short, models explain the relationship between two or more economic variables. Models explain how individuals and firms allocate their resources and how market prices are determined.

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6
Q

Theoretical Economics

A

is the development and use of models to test hypothesis

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7
Q

Economic hypothesis

A

predictions about cause and effect

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8
Q

Positive statement

A

Is a statement/hypothesis that is testable about cause and effect. “Positive” tells us that we can test the truth of the statement. Positive statements tell us what WILL happen based on reality.

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9
Q

Normative statements

A

These are value judgments that tell us what SHOULD happen. A normative conclusion can be drawn without first conducting a positive analysis. A positive analysis should be conducted first to enable a better informed normative decision

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10
Q

How are models used

A

models are used by individuals, governments and firms to make decisions.

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11
Q

Quantity demanded

A

Quantity demanded is the amount of a good a consumer is willing to buy at a given price, holding other factors beyond price constant.

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12
Q

Demand Factors

A

Factors that influence consumers demand of a good or service include prices, taste, information, income, prices of other goods, and government actions

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13
Q

Demand curve

A

The demand curve shows the quantity demanded at each possible price, holding constant the other factors that may impact demand.

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14
Q

Law of Demand

A

Law of demand finds that consumers demand more of a good the lower its price. This is an empirical finding
and shows that demand curves slope downward.

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15
Q

Empirical Economics

A

Is the application of models to see what they result in. In other words, the testing of models on the real world

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16
Q

Movement ALONG the demand/supply curve

A

The changes in quantity demanded/supplied in response to changes in price.

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17
Q

Shift OF a demand/supply curve

A

The changes when a factor other than price changes.

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18
Q

Demand function

A

The demand function shows the effect of all relevant factors on the quantity demanded.

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19
Q

The slope of a demand curve

A

Delta P / Delta Q

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20
Q

Summing demand curves

A

As long as all consumers face the same price, we can add 2 or more demands together to get the total quantity demanded.

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21
Q

Supply Factors

A

costs of production and government rules and regulations.

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22
Q

Quantity supplied

A

the amount of a good that firms want to sell at a given price, holding other factors constant.

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23
Q

Supply Curve

A

is the graphical representation of quantity supplied at each possible price holding constant other factors.

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24
Q

Law of Supply

A

Doesn’t exists - supply curves generally slope up, but they can be vertical, horizontal, upward or downward sloping.

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25
Q

Supply function

A

A mathematical explanation of the relationship between quantity supplied and price and other factors

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26
Q

Equilibrium

A

When no one wants to change their behavior.

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27
Q

Equilibrium price

A

A price that allows all consumers to purchase as much as they want and all suppliers to sell as much as they want.

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28
Q

Equilibrium quantity

A

The quantity that is bought/sold at the equilibrium price

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29
Q

Excess demand

A

happens when a price is below the equilibrium price and the quantity demanded by consumers is more than the quantity suppliers are willing to sell at that price

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30
Q

Excess supply

A

happens when the price is above the equilibrium price and suppliers want to sell more at a higher price, but consumers are not willing to pay that high of a price and their demand is lower resulting in excess supply. Suppliers will lower their price to avoid having their product go bad and clear the market

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31
Q

Market clearing

A

is when there isn’t anything left to sell or buy because market equilibrium was found

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32
Q

Quota

A

A limit the government sets on the quantity of a foreign-produced good that may be imported

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33
Q

Policies that shift supply curves

A

Licensing and quotas are two examples of policies that affect a market equilibrium.

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34
Q

Price ceiling

A

when the government sets the maximum price of a good/service.

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35
Q

Price floor

A

when the government sets the minimum price of a good/service.

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36
Q

Non-binding price ceiling

A

There is no effect if the equilibrium price is below the price ceiling (non-binding)

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37
Q

Binding price ceiling

A

means that the market would adjust to a higher price but the price ceiling is preventing the natural adjustment resulting in a shortage. Resulting in an equilibrium with a shortage

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38
Q

Shortage

A

When the price is below the equilibrium price, buyers would be delighted to buy cheap gas, but many sellers are going to close shop creating a shortage.

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39
Q

Elasticity

A

The percentage change in a variable given the percentage change in another variable

40
Q

Price elasticity of demand

A

is the percentage change in quantity demanded divided by percentage change in price. Represented by -b(P/Q) and resulting in a pure number without a unit of measure. elasticity of demand is always negative. Describes a movement along the demand curve as a result of a price change

41
Q

Linear quantity demand function

A

Q = a-bP
where a is the quantity demanded when price is zero
-b is the inverse of the slope (deltaQ/deltaP)

42
Q

What is the elasticity function for a linear demand curve?

A

epsilon=(deltaQ/Q) / (deltaP/P) or (deltaQ/deltaP)(P/Q)

43
Q

Perfectly inelastic demand

A

Happens when there is no substitutes. Where elasticity of demand is 0. it’s a vertical demand curve

44
Q

Inelastic demand

A

When demand elasticity is between 0 and -1. 0>epsilon>-1 It falls between the midpoint of the demand curve and the lower end where Q=a. In other words, where the demand curve is inelastic, a 1% change in price will have less than 1% decrease in quantity demanded.

45
Q

Unitary elasticity demand

A

is at the midpoint of the linear demand curve where a 1% increase in price causes a 1% fall in quantity.

46
Q

Elastic demand

A

At prices above the midpoint of the demand curve, the elasticity of demand is less than -1. epsilon

47
Q

Perfectly elastic demand

A

Perfect substitutes. When people are super sensitive to price changes. Charge more, you won’t sell anything. Charge less, they’ll buy you out. Where the demand curve hits the price axis and when epsilon approaches negative infinity. it’s a horizontal demand curve

48
Q

Revenue

A

is P*Q or the area beneath the demand at a certain price and quantity

49
Q

Short-run elasticity

A

the shape of a demand curve depends on the relevant time period. A short run’s duration depends on how long it takes consumers or firms to adjust for. It’s length is impacted by ease of substitution and storage opportunities

50
Q

What determines the degree a shock shifts the supply curve and affects the equilibrium prices and quantity

A

The shape of the demand curve

51
Q

What determines the degree a shock shifts the demand curve and affects the equilibrium?

A

The shape of the supply curve

52
Q

Income elasticity

A

is the percentage change in the quantity demanded in response to a given percentage change in income. (deltaQ / Q) / (deltaY / Y) = (deltaQ/deltaY)(Y/Q)

53
Q

Cross-price elasticity

A

the percentage change in the quantity demanded in response to a given percentage change in the price of another good. (deltaQ/Q) / (deltaPother/Pother) = (deltaQ/deltaPother) (Pother/Q)

54
Q

What is price elasticity of supply

A

represented by eta, it is the percentage change in the quantity supplied in response to a given percentage change in price. Describes a movement along the supply curve as price changes.

55
Q

What is the linear supply curve function

A 
Q = g + hp where g and h are constants
h = deltaQ / delta P
56
Q

What is the elasticity of supply for a linear supply function?

A

eta = (deltaQ/deltaP)(P/Q) or h(P/Q) where h is a constant

57
Q

ad valorem tax

A

for every dollar a consumer spends, the government keeps a portion.

58
Q

what is a specific tax

A

a specific dollar amount is collected per unit of output

59
Q

Price takers

A

is when the sellers in a market can’t influence the price because there are many sellers and if any tried to charge a higher price they will not attract any buyers

60
Q

Does a price change tell us enough to determine the cause?

A

No, a drop in demand or an increase in supply can lead to a price drop.

61
Q

Excess supply of labor

A

is unemployment

62
Q

As a demand curve gets more elastic, what happens to tax burden?

A

It is borne by producers because the consumer has the negotiating power

63
Q

Outward shift of a demand curve is caused by

A

the increase of the price of a substitute

64
Q

What do you need to estimate the elasticity of demand

A

A supply curve shifter that only works on that market

65
Q

What do you need to estamate the elasticity of supply?

A

A demand curve shifter that only works on that market

66
Q

consumer theory

A

the subject concerned with what lies behind the demand curve

67
Q

producer theory

A

the subject concerned with what is behind the supply curve

68
Q

three components of consumer theory

A

preferences, utility and budget constraint

69
Q

formula to find the linear equation between two points

A

Qd -Qd1=(Qd2-Qd1)/(P2-P1)* (P-P1)

70
Q

preference assumptions

A
  1. completeness in how you feel (prefer one over the other or are indifferent, but you always know)
  2. transitivity if a>b and b>c then a>c
  3. non-satiation - you’ll always want more
71
Q

indifference curves are

A

preference maps of every available bundles - help us understand how individuals make choices. you are indifferent between any points on a given indifference curve.

72
Q

4 properties of indifference curves

A 
1. further from origin
 is better
2. downward sloping
3. never cross
4. one indifference curve through any given bundle
73
Q

utility function

A

helps us rank options

74
Q

marginal utility

A

The derivative of the utility function with respect to the quantity of the good.

75
Q

Marginal rate of substitution

A

The rate you desired to trade good x for good y. It’s about your tastes. How you feel about trading off the next pizza for the next movie. How much of x am i willing to give up for y as we move along an indifference curve MUx/MUy

76
Q

Budget constraint

A

Y = ApA+BpB

Where Y is your income

77
Q

Opportunity cost

A

The value of the next best foregone alternative

78
Q

Marginal rate of transformation

A

The rate the market allows you to trade one good for another. It’s about the market conditions.
MRT = -Px/Py the magnitude of the slope of the budget constraint

79
Q

Highest indifference curve you can achieve

A

where the slope of the indifference curve equals the slope of the budget constraint

80
Q

When plotting budget constraints or indifference curves, what measures do the axes represent

A

They represent quantities of good A and B

81
Q

When solving for a constrained maximization problem graphically, we are solving for…

A

a point of tangency

82
Q

MRS = MRT

A

you set the rate you’d like to trade a for b and set that equal to the rate the market will let you trade a for b. It is the benefit cost calculus. Where MRS is the marginal benefit and MRT is the marginal cost.
MRT = -Pa/Pb The ratio of prices of a and b which = MRS = -MUa/MUb
or you can rewrite it as MUa/Pa = MUb/Pb

83
Q

inferior good

A

a good that decreases in demand when consumer income increases

84
Q

normal good

A

a good that increases in demand when come income increases

85
Q

necessity good

A

a normal good that increases less than proportionately in demand when consumer income rises

86
Q

luxury good

A

a normal good that increases more than proportionately in demand than when consumer income rises

87
Q

substitution effect

A

how much less of a good do you want holding your utility constant because the price ratio changed

88
Q

income effect

A

holding prices constant how much less of the good do you want because you’re poorer

89
Q

giffen

A

a good where the price goes up and you want more of it. only happens if its an inferior good with an income effect that is larger than the substitution effect.

90
Q

deriving labor supply

A

slope = -wage. price you’re giving up to sit around

91
Q

Short run

A

Some inputs are fixed (capital) and some are variable (labor)

92
Q

Long run

A

All inputs are variable

93
Q

SR Production function

A

q = f(L,Kbar)

94
Q

Marginal Product of Labor

A

holding Kbar constant, MPL = change in q/change in L

q2-q1)/(L2-L1

95
Q

MRTS Marginal rate of technical subsitution

A

The slope of isoquants for production functions

96
Q

MRTS Marginal rate of technical subsitution

A

The slope of isoquants for production functions. MPL/MPK

MIT DEDP Microeconomics 14.100x (3 decks)

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