Supply and Demand Primer Flashcards
Economics
study of production, distribution and consumption
Macro-economics
aggregate economics; quantities; ex: national output or national income
Micro-economics
market analysis and decision based on individuals (homes and businesses)
Supply and Demand Analysis
study how buyers and sellers interact to decide prices and quantities
Consumers
households; individuals
Firms
companies; producers
Consumption
demands for goods and
Theory of the Consumer
households want more bang for their buck
Theory of the Firm
supply and goods of survives by profit-maximizing firms
Factors Market
markets for the purchase and sale of factors used in production;ex: land, labor, materials of production; household = sellers; firms = buyers
Labor Market
type of factor markets; households sell services when they think payment outweighs the free time they have to give up; firms hire workers when they think the cost of payment is not as important as the productivity gains
Goods Market
markets for the output of production; sellers firms; buyers households AND firms
Intermediate Goods/Services
G/S used as inputs to produce other G/S; not the final product
Capital Markets
markets for long-term financial capital; equity or bond markets
Demand
willingness/ability of consumers to purchase a given amount good/service at a given price
Supply
willingness/ability of producers to sell a given Q for a given price
Equilibrium Quantity
when highest price buyers will accept matches the lowest price sellers want to sell
Equilibrium Price
when the quantity buyers are willing to buy matches the quantity sellers are willing to sell
Law of Demand
general theory is that as price rises, people will buy less of it and vice versa
Demand Function
sees quantity as a function of price; price influences how much demand there is; Q = (Px, income, Py); Q is influenced by Px
Own Price
Px; only references the price of a specific product; and not some other product
Ceteris Paribus
holding all other things equal; aka comparing the independent variable against only one variable
Inverse Demand Function
views price as a function of quantity; aka about prices not quantity
Demand Curve
shows 1) the largest Q a household will buy at a given price 2) the highest price a consumer would be willing to pay for a given Q; graph of the inverse demand function
Slope/Curve
“rise over run”= change in vertical / change in horizontal
Supply Function
Quantity supplied as a function of price; quantity depends on price of goods being made/ being sold;
Technology of Production
“rules” that govern the transformation of inputs/COP transformation
COP
transforming factors/inputs into finished goods/services/ outputs
Supply Curve
graph of the inverse supply function
Change in Supply
shift in the supply curve
Change in Quantity Supplied
movement along the supply curve; only happens with the selling price change of the product
Market Equilibrium
when quantity offered for sale at a given price is EQUAL to the quantity demanded from buyers at the same price
Behavioral Models
model the behavior of buyers and sellers
Exogenous Variables
variables other than price and quantity that are determined by factors outside of the demand/supply model
Endogenous Variables
quantity and price as defined in the model market; not external factors
Equilibrium Condition
an equation that solves the unknown (exo factors) with the Endo factors
Partial Equilibrium Analysis
concentrating on one market and the exogenous variables as given
General Equilibrium Analysis
taking into account all the factors in all markets simultaneously
Market Mechanism
when price adjusts so there is neither excess supply or excess demands
Excess Supply
quantity supplied is larger than demanded; fix: prices falls
Excess Demand
quantity supplied is less than demanded; fix: price increases
Stable Equilibrium
when price is bumped from equilibrium price it tends to go back
Unstable Equilibrium
when a pricing over equilibrium price will create excess demand, and price below price equilibrium would cause excess supply
Elasticity
the ratio of percentage changes; how sensitive one variable is to another
Own-Price Elasticity
how the price of a product relates to demand
Short Run
period where at least 1 factor of production is fixed
Long Run/ Planning Horizon
all factors of production are variable; in this period firms can enter or exit the market based off of profitability
SRATC
short run avg total costs; defines what the per-unit cost will be for any Q in the short run
LRATC
Long run avg total cost; lowest cost per unit where output can be produced over a long time when the firm can make technology/plant size/ physical capital adjustments
Economies of Scale/ Increasing Returns to Scale
output increases at a greater rate than input increases
Diseconomies of Scale/ Decreasing Returns to Scale
when output increases by a smaller amount than increase in inputs
Minimum Efficient Scale
MES; minimum point on the LRATC
Constant Returns to Scale
output increases by the same proportion as the increase in inputs
Long Run Insustry Supply Curve
shows relationship between quantities supplied and output prices for an industry when firms are able to exit/enter the market in response to the level of short term economic profit
Increasing-Cost Industry
price and costs are higher than industry output is increased in the long-run (slopes positive)
Decreasing-Cost Industry
resource costs go down, so output prices can go down
Constant-Cost Industry
cost of resources doesn’t change
Productivity
average output per unit of input
Total Product
sum of all inputs during a time period
Average Product
measure of labor’s productivity; TP/ L or Q/L
Marginal Product Return
result of additional output from using one more unit of input assuming other inputs are fixed; Change in TP / change in L (or change in Q)
Increasing Marginal Returns
marginal product of a resource increases as additional units of that input are employed
Law of Diminishing Returns
at some point adding more resources is a negative thing
Marginal Revenue Product
price of input; MP x Pl measures the value of the input to the firm in terms of its contribution to TR
Ascending Price Auction
an auction in which an auctioneer calls out prices for a single item and potential buyers bid directly against each other, with each subsequent bid being higher than the previous one
Dutch Auction
auction in which the auctioneer begins at a high price, then lowers the called price in increments until there is a willing buyer for the item being auctioned
Second Sealed Price Auction
auction (also known as a Vickery auction) in which bids are submitted in sealed envelopes and opened simultaneously. The winning buyer is the one who submitted the highest bid, but the price paid is equal to the second highest bid
SinglePrice Auction
Dutch auction variation, also involving a single price, is used in selling US Treasury securities
