Supply and demand - Chapter 2/Chapter 3 Flashcards
Define demand
A consumers desire, willingness, and ability to purchase goods and services
Define Quantity demanded
The quantity demanded is the amount of a good or service a consumer is willing to
buy at a given price, holding other factors constant.
Describe a demand schedule
This is a chart showing the quantity demanded at different prices
Define Law of demand
Consumers demand a higher quantity of a good or service when the price is lower
(and a lower quantity of when the price is higher), holding all other factors that
influence the amount consumers want to consume constant.
What does the demand curve show you
Tells us how the change in price of a good or service affects the quantity demanded
How do you get the total quantity demanded at a given price
this is equal to the sum of the individual consumer demands at that price (only at that particular price!)
- this is horizontal summation
Define quantity supplied
The amount of good or service that producers want to sell at a given price, holding other factors that influence supply decisions constant
Define Law of supply
Producers will normally offer more for sale at higher prices and less at lower prices when holding other factors constant
How do you obtain total market supply
By adding up the quantities supplied at that particular price
Define market equilibrium
The market is in equilibrium when all market participants are able to buy or sell as much as they want, no participant wants to change their behavior given what other market participants are doing
Define market price
The equilibrium price is the p at which demand equals supply, consumers can buy as much as they want and sellers can sell as much as they want
Define market quantity
The equilibrium quantity is the q such that the quantity demanded equals the quantity supplied
What happens when there is an increase in demand and a decrease in supply
This could lead to increase price, but the effect on quantities is ambiguous
What happens when demand and supply both increase
equilibrium quantities will increase but the effect on price is ambiguous
What happens when supply decreases and demand increases
price increases but the effect on quantity is ambiguous
When demand and supply shift at the same time, what two things determine the outcome
The sizes of the shift and the price elasticities of demand and supply determine the outcome
Describe inelastic demand or supply
This means that elasticity is less than one
Perfectly inelastic demand or supply has an elasticity of
0
Perfectly elastic demand has
undefined elasticity
The more elastic demand is the more
responsive customers are
Governments use what three approaches to shift curves
- Limits on who can buy
- Restrictions on imports or exports
- Government purchases
Import restrictions do what
They shift the importing countries supply curve to the left
Restrictions on exports do what
They shift the exporting countries demand curve to the left
What effect does government purchases have
Governments can buy good directly, this increases the quantity demanded at each price shifting the demand curve to the right
What are the two forms of price controls that governments can enact in the market
- Price ceiling - policy in which government sets a maximum price that can prevail in the market
- Price floor - policy where the government sets a minimum price that can prevail in the market
If the government intervenes in the market, does supply still need to equal demand
No, in the absence of government intervention, supply will equal demand and the market will then clear. But with government intervention, the quantity demanded and quantity supplied need not equal the actual quantity that is bought and sold
The supply and demand model works in what type of markets
in perfectly competitive markets
What are the 5 characteristics of perfectly competitive markets
- Many buyers and sellers
- Consumers believe all firms produce identical products
- all market participants have full information about price and product characteristics
- transaction costs are negligible
- firms can easily enter and exit the market, so competition is high
Describe elastic demand
elasticity larger than 1
How does a perfectly elastic demand curve look
- Horizontal demand curve
- If the price increases even slightly, demand falls to zero
- consumers may view this good as identical to another good and do not care which one they buy
What does a perfectly inelastic demand curve look like
- Vertical demand curve
- If the price goes up, the quantity demanded is unchanged
- this is for essential goods - goods that people feel they must have and will pay anything to get it
Describe income elasticity, what is it for normal goods and inferior goods
- Income elasticity is the percentage change in quantity divided by the percentage change in income
- Normal goods have positive income elasticity, such as coffee
- Inferior goods have negative income elasticity, such as instant soup and ramen noodles
Describe cross price elasticity for complement goods and substitute goods
- Compliment goods have negative cross price elasticity, such as cream and coffee
- substitute goods have positive cross price elasticity, such as cotton and wool
(so if cross price elasticity is positive - then goods are substitute, etc.)
