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Business Economics > Theory of Demand and Supply 1.0 > Flashcards

Theory of Demand and Supply 1.0 Flashcards

1
Q

What is a market?

A

A market is any arrangement that enables buyers and sellers to get information and to do business with each other

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2
Q

What is a competitive market?

A
  • Has many buyers and sellers
  • No single buyer or seller can influence the price
  • Producers sell when the price covers the OC
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3
Q

What is opportunity cost?

A

The highest valued alternative foregone

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4
Q

What is demand?

A

Wanting something, being able to afford it and planning to buy it

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5
Q

What is the law of demand?

A

Other things remaining the same, the higher the price of a good, the smaller is the quantity demanded; and the lower the price of a good the greater is the quantity demanded.

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6
Q

What is the substitution effect?

A

Goods have substitutes, as the OC of a good rises (price rises), the incentive to switch to a substitute that is cheaper becomes stronger

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7
Q

What is the income effect?

A

When prices rise and income remains the same, people cannot afford the things they previously bought. They must decrease their QD.

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8
Q

What is the difference between quantity demanded and demand?

A

Demand = entire relationship between the price of a good and the QD. QD = point on the demand curve, QD at a particular price

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9
Q

What is a demand schedule?

A

A demand schedule lists the quantities demanded at each price when all other influences on consumers’ planned purchases remain the same.

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10
Q

How does the willingness and ability to pay curve measure marginal benefit?

A

If a small quantity is available, the highest price that someone is willing and able to pay for one more unit is high. As the quantity available increases, the MB of each additional unit falls and the highest price that someone is willing and able to pay also falls along the demand curve.

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11
Q

When is there a change in demand?

A

When any factor that influences buying plans changes, other than the price of the good, there is a change in demand.

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12
Q

What happens when demand increases?

A

When demand increases, the curve shifts right and the quantity demanded at each price is greater.

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13
Q

What factors bring changes in demand?

A
  • The price of related goods
  • Expected future prices
  • Income
  • Expected future income and credit
  • Population
  • Preferences
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14
Q

How does the price of related goods influence demand?

A
  • If the price of a substitute rises, people will buy less of the substitute
  • If the price of the substitute falls, people will buy more of the substitute
  • If the price of a complement increases, people may buy less of the good and vice versa
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15
Q

How does expected future prices influence demand?

A

They buy more of the good now because the price is expected to rise and less of the good afterward, so the demand today increases and vice versa

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16
Q

How does income influence demand?

A

Consumers’ income influences demand When income increases, consumers buy more of most goods and when income decreases, consumers buy less of most goods

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17
Q

How does expected future income and credit affect demand?

A

When expected future income increases or credit becomes easier to get, demand for a good might increase now

18
Q

How does population influence demand?

A

The larger the population, the greater is the demand for all goods and services. The smaller the population, the smaller is the demand for all goods and service

19
Q

How do preferences influence demand?

A

Demand depends on preferences. Preferences determine the value that people place on each good and service

20
Q

What is the difference between a change in demand and a change in the quantity demanded?

A

A change in demand brings a shift in the demand curve and a change in the QD brings a movement along the demand curve

21
Q

When is there a movement along the demand curve/change in QD?

A

When the price of the good changes but nothing else influences buying plans - price increase = up along, price decrease = down along

22
Q

When is there a shift of the demand curve/change in demand?

A

When the price of a good remains constant but some other influence on buying plans changes, right = increase, left = decrease

23
Q

What is supply?

A
  • Having the resources and technology to produce a good
  • Profiting from producing the good
  • Planning to produce a good and sell it
24
Q

What is the difference between supply and quantity supplied?

A

Supply reflects a decision about which technologically feasible items to produce. The quantity supplied of a good or service is the amount producers plan to sell during a given time period at a particular price.

25
Q

What is the law of supply?

A

Other things remaining the same, the higher the price of a good, the greater is the quantity supplied; and the lower the price of a good, the smaller is the quantity supplied

26
Q

Why does a higher price increase the quantity supplied?

A

As the quantity produced of a good increases, the MC of the good increases. It is not worth producing a good if the price does not cover the MC of producing it. When the price of a good rises, producers are willing to incur a higher MC, so they increase production. The higher price brings an increase in the QS.

27
Q

What is a supply schedule?

A

A supply schedule lists the quantities supplied at each price when all other influences remain constant.

28
Q

How is the minimum supply price determined?

A

The supply curve shows the lowest price at which someone is willing to sell. The lowest price is the marginal cost.

29
Q

How does the minimum supply price vary according to quantity?

A

If a small quantity is produced, the lowest price at which someone is willing to sell one more unit is low. As the quantity produced increases, the marginal cost of each additional unit rises, so the lowest price at which someone is willing to sell rises along the supply curve

30
Q

What factors bring about a change in supply?

A
  • The prices of factors of production
  • The prices of related goods produced
  • Expected future prices
  • The number of suppliers
  • Technology
  • The state of nature
31
Q

How do the prices of factors of production influence supply?

A

If the price of a factor of production rises, the lowest price that a producer is willing to accept for that good rises, so supply decreases

32
Q

How do the prices of related goods influence supply?

A

E.g if the price of energy gel rises, firms switch production from bars to gel, the supply of energy bars decreases

33
Q

How do expected future prices influence supply?

A

If the expected future price of a good rises, the return from selling the good in the future increases and is higher than today. Supply today decreases and increases in the future

34
Q

How does the number of suppliers influence supply?

A

The larger the number of firms that produce a good, the greater is the supply of the good. As new firms enter, supply increases and as they leave it decreases

35
Q

How does technology influence supply?

A

The way the factors of production are used to produce a good. A change occurs when a new method is discovered that lowers the cost of producing a good. As the cost of producing is lower, can supply more

36
Q

How does the state of nature influence supply?

A
  • All natural forces that influence production
  • E.g weather and natural environment
  • Good weather can increase the supply of many agricultural products and bad can decrease their supply
  • When supply increases, the curve shifts rightward
37
Q

When does a movement along the supply curve/change in quantity supplied occur?

A

If the price of the good changes and all other things remain the same, there is a change in the QS of that good. If the price of the good falls, the QS decreases and there is a movement down along the supply curve.

38
Q

What causes a shift in the supply curve?

A

When any other factor that influences supply changes, the curve shifts and there is a change in supply.

39
Q

What is the market equilibrium?

A

An equilibrium is a situation in which opposing market forces balance each other. Equilibrium in a market occurs when the price balances buying plans and selling plans.

40
Q

What is the equilibrium price and quantity?

A

The equilibrium price is the price at which the quantity demanded equals the quantity supplied. The equilibrium quantity is the quantity bought and sold at the equilibrium price.

41
Q

Why does a market move towards its equilibrium?

A
  • Price regulates buying and selling plans

- Price adjusts when plans don’t match

Business Economics (14 decks)

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