Supply and Demand Flashcards
Microeconomics
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.
Trade-Offs
There are three trade-offs that society faces:
- What should be produced - based on the available resources - workers, capital, material, energy
- 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)
- Who gets the goods/services is based on constrains and resources of consumers given there is not an indefinite supply of goods/services
Prices
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
Market
A market is an exchange mechanism that allows buyers to trade with sellers.
Model
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.
Theoretical Economics
is the development and use of models to test hypothesis
Economic hypothesis
predictions about cause and effect
Positive statement
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.
Normative statements
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
How are models used
models are used by individuals, governments and firms to make decisions.
Quantity demanded
Quantity demanded is the amount of a good a consumer is willing to buy at a given price, holding other factors beyond price constant.
Demand Factors
Factors that influence consumers demand of a good or service include prices, taste, information, income, prices of other goods, and government actions
Demand curve
The demand curve shows the quantity demanded at each possible price, holding constant the other factors that may impact demand.
Law of Demand
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.
Empirical Economics
Is the application of models to see what they result in. In other words, the testing of models on the real world
Movement ALONG the demand/supply curve
The changes in quantity demanded/supplied in response to changes in price.
Shift OF a demand/supply curve
The changes when a factor other than price changes.
Demand function
The demand function shows the effect of all relevant factors on the quantity demanded.
The slope of a demand curve
Delta P / Delta Q
Summing demand curves
As long as all consumers face the same price, we can add 2 or more demands together to get the total quantity demanded.
Supply Factors
costs of production and government rules and regulations.
Quantity supplied
the amount of a good that firms want to sell at a given price, holding other factors constant.
Supply Curve
is the graphical representation of quantity supplied at each possible price holding constant other factors.
Law of Supply
Doesn’t exists - supply curves generally slope up, but they can be vertical, horizontal, upward or downward sloping.
Supply function
A mathematical explanation of the relationship between quantity supplied and price and other factors
Equilibrium
When no one wants to change their behavior.
Equilibrium price
A price that allows all consumers to purchase as much as they want and all suppliers to sell as much as they want.
Equilibrium quantity
The quantity that is bought/sold at the equilibrium price
Excess demand
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
Excess supply
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
Market clearing
is when there isn’t anything left to sell or buy because market equilibrium was found
Quota
A limit the government sets on the quantity of a foreign-produced good that may be imported
Policies that shift supply curves
Licensing and quotas are two examples of policies that affect a market equilibrium.
Price ceiling
when the government sets the maximum price of a good/service.
Price floor
when the government sets the minimum price of a good/service.
Non-binding price ceiling
There is no effect if the equilibrium price is below the price ceiling (non-binding)
Binding price ceiling
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
Shortage
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.