Supply, Demand, and Equilibrium Flashcards
Arguments in favour of trade
- It pays off for countries to trade because they differ
- Trade opens domestic markets to foreign suppliers which
- Trade allows domestic firms access to larger markets (overseas)
Arguments against trade
- Not everyone’s a winner
- But free trade ultimately improves welfare in aggregate
What is demand?
Quantity demanded (Qd) = the amount of a good that buyers are willing and able to purchase
What is the Law of Demand?
The claim that, other things equal, the quantity demanded of a good falls when the price of a good rises.
What does a change in price to to the demand curve?
A change in price causes a movement ALONG the demand curve.
What does a change in any other variable do (demand)?
A change in any other variable SHIFTS the demand curve. (When the demand curve shifts, a different quantity is demanded at each and every price)
What is a normal good?
A good for which, other things being equal, an increase in income leads to an increase in Qd.
What is an inferior good?
A good for which, other things being equal, an increase in income leads to a decrease in Qd.
If income increases, how will demand respond?
If income ↑ , demand is likely to ↑. This causes the demand curve to shift to the right (because for any given price, more of the good is now demanded)
What is a substitute?
Two goods for which a decrease in the price of one good leads to a decrease in the demand for the other good.
What is a complimentary good?
Two goods for which a decrease in the price of one good leads to an increase in the demand for the other good.
A change in Price does what? (Demand curve)
A change in P causes a move ALONG the demand curve.
A change in any other variable does what? (Demand curve)
A change in any other variable causes a SHIFT of the demand curve.
What is Supply?
Quantity supplied (Qs) = the amount of a good that sellers are willing and able to sell.
What happens to Supply when Price rises?
As P rises, suppliers supply more of the good (because they can make more money per unit)
What is the Law of Supply?
The claim that, other things being equal, the quantity supplied of a good rises when the price of a good rises.
What is Equilibrium?
A situation where supply and demand have been brought into balance. (S = D).
What is Equilibrium price?
The price that balances supply and demand.
What is Equilibrium Quantity?
The quantity supplied and the quantity demanded when the price has adjusted to balance supply and demand.
If P is above equilibrium, how will suppliers react?
There is excess supply (a surplus) Suppliers will reduce price to increase sales (& get rid of surplus)
If P is below equilibrium, what happens?
There is excess demand (a shortage)
Suppliers will realise they can increase prices.
What happens if demand for a good increases?
This pushes up its price (relative to other goods) & suppliers supply more of the good (because it is now more profitable for them to do so)
