Unit 2 Flashcards
Front (Question)
Back (Answer)
What does supply represent?
The quantity of a good or service that producers are willing and able to offer at various prices.
What does demand represent?
The quantity of a good or service that consumers are willing and able to purchase at various prices.
What is market equilibrium?
When the quantity supplied equals the quantity demanded, resulting in a stable price.
What does elasticity measure?
The responsiveness of supply or demand to changes in price or other factors like income or prices of related goods.
What are price controls?
Government interventions like price ceilings and price floors that can distort market outcomes, leading to shortages or surpluses.
What causes a shift in supply or demand curves?
Changes in factors other than price, like technology, expectations, or preferences.
What causes a movement along supply or demand curves?
A change in the price of the good itself.
Why are supply curves upward-sloping?
Higher prices incentivize producers to supply more, following the law of supply.
Why are demand curves downward-sloping?
Higher prices make goods less affordable, reducing quantity demanded, following the law of demand.
What does a steeper supply or demand curve indicate?
Less elasticity (more inelastic).
What does a flatter supply or demand curve indicate?
More elasticity.
What factors shift the supply curve?
Changes in input prices, technology, expectations, and number of sellers.
What factors shift the demand curve?
Changes in income, preferences, expectations, and prices of related goods (substitutes or complements).
What determines the equilibrium price and quantity?
The intersection of the supply and demand curves.
What happens if price is above equilibrium?
A surplus occurs, putting downward pressure on price.
What happens if price is below equilibrium?
A shortage occurs, putting upward pressure on price.
What is the difference between a shift and a movement along a curve?
Shifts are caused by non-price factors, movements are caused by price changes.
What is price elasticity of demand (PED)?
The percentage change in quantity demanded divided by the percentage change in price.
What indicates elastic demand?
PED > 1, quantity demanded is highly responsive to price changes.
What indicates inelastic demand?
PED < 1, quantity demanded is less responsive to price changes.
What is unit elastic demand?
PED = 1, meaning percentage change in quantity demanded equals percentage change in price.
What is price elasticity of supply (PES)?
The responsiveness of quantity supplied to changes in price.
What indicates elastic supply?
PES > 1, quantity supplied is highly responsive to price changes.
What indicates inelastic supply?
PES < 1, quantity supplied is less responsive to price changes.
What is income elasticity of demand?
The responsiveness of demand to changes in consumer income.
What is cross-price elasticity of demand?
The responsiveness of demand for one good to changes in the price of another good.
What is a price ceiling?
A legal maximum price; if set below equilibrium, it causes a shortage.
What is a price floor?
A legal minimum price; if set above equilibrium, it causes a surplus.
How do taxes affect markets?
Taxes increase production costs, shift supply left, raise prices, and lower quantity.
How do subsidies affect markets?
Subsidies reduce production costs, shift supply right, lower prices, and increase quantity.
How do businesses use supply and demand?
To make production and pricing decisions based on market conditions and elasticity.
How do policymakers use supply and demand?
To predict the effects of regulations, taxes, and subsidies on markets.
How do consumers use supply and demand?
To make informed purchasing decisions and anticipate changes in prices and availability.
What is a common mistake regarding shifts and movements?
Confusing shifts caused by non-price factors with movements caused by price changes.
What is a common mistake regarding price controls?
Misinterpreting that price ceilings lead to shortages and price floors lead to surpluses.
How does elasticity affect changes in price and quantity?
More elastic markets have larger changes in quantity and smaller changes in price.
What is a common mistake regarding market interventions?
Ignoring indirect effects like incentives and market efficiency impacts.
Do all markets operate the same?
No, different goods and services have unique supply and demand characteristics.
