Theory of Demand and Supply 2.0 Flashcards
How can price regulate the quantities demanded and supplied?
If the price is too high, the quantity supplied exceeds the quantity demanded. If the price is too low, the quantity demanded exceeds the quantity supplied. There is one price at which the quantity demanded equals the quantity supplied.
How does a shortage in supply force prices up?
- Rises eliminate elastic consumers
- Those willing to pay the highest price get the good
- Rising prices reduce the shortage as it reduces the QD and increases QS
- Price eventually rest at equilibrium
How does a surplus force prices down?
- Producers unable to sell their stock will cut their prices
- Some producers cut back production
- As producers cut their price it falls back to the equilibrium and demand increases as prices are lower
What is the best deal available to buyers and sellers?
At the price at which the QD and the QS are equal, neither buyers, or sellers can do business at a better price. Buyers pay the highest price they are willing to pay for the last unit bought and sellers receive the lowest price at which they are willing to supply the last unit sold
What happens when there is an increase in demand?
The increase in demand creates a shortage at the original price and to eliminate the shortage, the price must rise. It leads to an increase in the quantity supplied but no increase in supply
What happens when there is a decrease in demand?
- A decrease in demand shifts the curve leftward
- Price falls
- Quantity supplied falls
What happens when there is an increase in supply?
- If they find new cost saving technology, producers may be able to supply more
- The price falls
- The quantity supplied increases = surplus
- The price falls until quantity supplied equals quantity demanded
- No shift of demand curve
What happens when there is a decrease in demand?
- Decrease in supply shifts the curve leftward
- Equilibrium price rises
- Quantity demanded decreases
- Equilibrium quantity decreases
