Unit 1 - Supply and Demand Flashcards
Markets for goods and services
Firms sell, households buy
Firms
Produce and sell, hire and use factors of production
Households
buy and consume, own and sell factors of production
Markets for factors of production
households sell, firms buy
factors of production
labor, capital, land
Perfectly competitive market characteristics
Enough buyers and sellers so no one can affect the prices - everyone is a price taker.
Everyone sells the same good
Price taker
takes prices as given when deciding
homogenous good
the same good
i.e. agricultural industry - apples
imperfect competition
can exist as a monopoly, monopolistic competition, or monopsony
Initial assumption
no market failure
Quantity demanded
amount that a consumer is willing to buy at a particular price (i.e. 1 point on the line)
Demand
relationship between price and quantity demanded (i.e. the whole line)
The demand curve
doesn’t need to be straight, represents P & Q relationship, represents personal preference
Why is slope of the demand curve negative?
Law of Demand: when price of a good rises, the quantity demanded falls
Shifts of demand (what is held constant in the demand curve?)
Normal good: you demand more when income increases
inferior good: you demand less when income decreases and usually has a better substitute
how will an increase in income affect demand for a normal good?
it’s not a variable on the graph, so it’s held constant when we draw the curve. when it changes, the curve shifts.
an increase in income
causes D curve to shift out (higher quantity demanded at any price)
complements in consumption
goods used together (i.e. coffee & sugar)
substitutes in consumption
goods used instead of each other (i.e. coffee & tea)
consumer preferences
can change b/c of trends, weather, knowledge, etc. and lead to shifts of D curve
Shifts along the demand curve
Caused by changes in income, prices of other goods, tastes (held constant in D curve)
Movements along the demand curve
caused by a change in the price of a good
market demand curve
horizontally sum all the individual demand curves
what is held constant in D curve?
- prices of complements/substitutes in consumption
- preferences
- income (based on specific type of good)
- expectations of future price increases (buy goods @ lower prices if they’ll increase later)
Principle 1 of Microeconomics: People Face Trade-Offs
Efficiency vs. equality
Efficiency
society gets max benefits from its scarce resources
Equality
uniform distribution of resources among society’s members
Principle 2
The Cost of Something Is What You Give Up to Get It
opportunity cost: what’s given up to get an item
Principle 3
Rational People Think at the Margin
rational people and marginal change
rational people
systematically and purposefully do the best to achieve their objectives, given available opportunities
marginal change
a small incremental adjustment to an existing plan of action
Principle 4
People Respond to incentives
incentive
induces action (i.e. punishment or reward)
Principle 5
Trade can make everyone better off
trade allows specialization for each person & buying goods and services at a lower cost
Principle 6
Markets are usually a good way to organize economic activity
market economy
allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
Adam Smith’s invisible hand theory
households and firms interact in markets as if they are guided by this –> desirable market outcomes
Smith’s corollary
When a government prevents
prices from adjusting naturally to supply and demand, it impedes the invisible hand’s ability to coordinate the decisions of the households and firms that make up an economy
Principle 7
Gov’t can sometimes improve market outcomes
market economies need institutions to enforce property rights so individuals can own and control scarce resources
property rights
the ability of an individual to own and exercise control over scarce resources
Why might a government intervene in the market economy?
to promote efficiency or to promote equality
market failure
market on its own fails to produce an efficient allocation of resources
Quantity supplied
point on supply curve
Supply/supply curve
entire line
Why does the S curve slope up as the quantity supplied increase?
cost of making 1 more unit of the good increases
What is held constant in supply curve?
input costs (or input prices)
prices of complements and substitutes in production
technology
weather (for agriculture goods)
taxes
expectations of future price increases (applies if you can store good)
input costs (or input prices)
good used in the production of another good
complements in production
goods produced together (i.e. nonfat milk & cream)
substitutes in production
goods that can be produced instead of each other (i.e. nonfat milk and 2% milk)
technology
new machine allows for faster cappuccino production (less labor)
weather (for agricultural goods)
like tech
taxes
like input costs
market supply curve
horizontal sum of individual S curves
equilibrium
where supply and demand are in balance, Qs = Qd (stable outcome, no pressure for price to go up/down)
shortage
Qd > Qs, price increases
equilibrium
no more pressure on price
How do price changes influence the market?
it goes to equilibrium
surplus
lowers price, Qd < Qs, price fall
