Unit 2 Supply and Demand Flashcards
Demand and the law of demand:
Relationship between price and quantity demanded
- Higher price, smaller quantity demanded
- Lower price, higher quantity demanded
(NEGATIVE RELATIONSHIP)
The demand curve has …
- An inverse relationship on the graph
- Willingness to pay curve = marginal benefit curve
- Demand increases = rightward shift
- Demand decreases = leftward shift
Inferior and normal goods:
Inferior = demand decreases as income increases
Normal good = demand increases as income increases
What are things that affect quantity demanded and demand?
Population: larger, greater demand for all goods
Preferences: if a preference for something increases due to things like scientific findings, demand will
Shifting and movement along the demand curve?
Movement along = Quantity demanded (due to price)
Shifting = change in demand (due to other things that are not price)
What are three things firms must-have when supplying?
1) Resources and technology to produce
2) Be able to profit from producing
3) Definite plan to sell
Quantity supplied is…
What is PLANNED to sell (not what is actually sold)
What is the law of supply?
-If there is a higher price there is a greater incentive -to produce which is b/c of marginal cost
The marginal cost for a producer is the opportunity cost of producing one more unit
- Prices must rise, producers incur higher costs, increasing production
Relationship on the supply curve:
Direct relationship: As price rises, quantity supplied rises
A change in price is movement ALONG supply curve
Changes in supply: (NOT price)
1) Prices of factors of production: supply with decrease if this increases
2) Price of related goods: substitutes and compliments
3) Expected future prices: supply decrease if expected future price rises
4) # of suppliers = supply increases if # of suppliers rises (more people producing)
5) Technology = supply will increase if the technology increases production
6) State of nature: supply increases if natural event increases production
What is the market equilibrium?
Quantity demanded = Quantity supplied
- Plans of buyers and sellers match perfectly
Price is …
A regulator and continues to adjust to reach equilibrium
Surplus is when…
There is excess supply
- Not able to sell the quantity willing and able to
- Then reduce price to sell more and continues to lower to reach equilibrium
Shortage is when…
There is excess demand …
- Not able to buy the quantity willing and able to
- Producers must rise prices toward equilibrium
