Unit 2: Supply and Demand Flashcards
Competitive market
Market in which there are many buyers and sellers of the same good or service, none of whom can influence the price at which the good or service is sold
Supply and demand model
Model of how a competitive market works
Demand schedule
Shows how much of a good or service consumers will be willing and able to buy at different prices
Quantity demanded
Actual amount of a good or service consumers are willing to buy at some specific price
Demand curve
Graphical representation of the demand schedule, showing the relationship between quantity demanded and price
Law of demand
States that higher price for a good of service, all other things being equal, leads people to demand a smaller quantity of that good or service
Change in demand
Shift of the demand curve, changing the quantity demanded at any given price
Movement along the demand curve
Change in the quantity demanded of a good that is the result of a good’s price change
Substitutes
Increase in price of one good results in the increased demand of the other
Complements
Increase in the price of one good results in a decreased demand for the other good
Normal good
Rise in income increases the demand for a good (normal case)
Inferior good
Rise in income decreases the demand for a good
Individual demand curve
Illustrates the relationship between the quantity demanded and price for an individual consumer
Quantity supplied
Actual amount of a good or service producers are willing to sell at some specific price
Supply schedule
Shows how much of a good or service producers will supply at different prices
Supply curve
Shows the relationship between quantity supplied and price
Law of supply
States that, other things being equal, the price and quantity supplied of a good are positively related
Change in supply
Shift of the supply curve, which changes the quantity supplied at any given price
Movement along the supply curve
Change in the quantity supplied of a good that is the result of a change in that good’s price
Input
Anything that is used to produce a good or service
Individual supply curve
Illustrates the relationship between quantity supplied and price for an individual producer
Equilibrium
Economic situation in which no individual would be better off doing something different
Equilibrium price (market-clearing price)
The price at which the quantity demanded of a good equals the quantity supplied of that good
Equilibrium quantity
Quantity of the good bought and sold at the equilibrium price
Surplus
Quantity supplied exceeds the quantity demanded (occurring when price is above the equilibrium level)
Shortage
Quantity demanded exceeds the quantity supplied (occurring when price is below its equilibrium level)
Price controls
Legal restriction on how high or low a market price may go (2 forms: price ceiling and price floor)
Price ceiling
Maximum price sellers are allowed to charge for a good or service
Price floor
Minimum price buyers are required to pay for a good or service
Inefficient allocation to consumers
People who want the good badly and are willing to pay a high price don’t get it, and those who care relatively little about the good and are only willing to pay a relatively low price do get it (often caused by price ceilings)
Wasted resources
People expend money, effort, and time to cope with shortages (typically caused by price ceilings)
Minimum wage
Legal floor on the wage rate, which is the market price of labor
Inefficiently low quality
Sellers offer low-quality goods at a low price even though buyers would prefer a higher quality at a higher price (often caused by inefficiency from price ceilings)
Black market
Market in which goods or services are bought and sold illegally (either because it is illegal to sell them at all or because the prices charged are legally prohibited by a price ceiling)
Inefficient allocation of sales among sellers
Those who would be willing to sell the goods at the lowest price are not always those who managed to sell it (caused by price floors)
Inefficiently high quality
Sellers offer high-quality goods at a high price, even though buyers would prefer a lower quality at a lower price (often caused by price floors)
Quality control (quota)
An upper limit on the quantity of some good that can be bought or sold
License
Gives its owner the right to supply a good or service
Demand price
Price at which consumers will demand that quantity
Supply price
Price at which producers will supply that quantity
Wedge
Difference between the demand and supply price of a good, in which the price paid by buyers ends up being higher than that received by sellers (driven b quantity control, or quotas)
Quota rent
Difference between demand and supply price at the quota amount, the earnings that accrue to the license-holder from ownership fo the right to sell the good (equal to the market price of the license when the licenses are traded)
Deadweight loss
Lost gains associated with transactions that do not occur due to market intervention
Substitution effect
Change in the quantity demanded as the good that has become relatively cheaper is substituted for the good that has become relatively more expensive
Income effect
Change in the quantity of a good demanded that results from a change in overall purchasing power of the consumer’s income due to a change in the price of that good
Percent change in quantity demanded (eq)
(Change in quantity demanded / initial quantity demanded)(100)
Price elasticity of demand
Ratio of the percent change in the quantity demanded to the percent change in the price as we move along the demand curve (dropping the minus sign)
Price elasticity of demand (eq)
% Change in quantity demanded / % change in price (w/o negative)
q2 - q1 / {(q1 + q2) /2}
——————————–
p2 - p1 / {p1 + p2} / 2
Percent change in price (eq)
(New price / old price)(100)
Midpoint method
Technique for calculating the percent change (calculate changes in a variable compared with the average, or midpoint, of the initial and final values)
Percent change in midpoint method (eq)
(Change in x / average value of x)(100)
Average value in midpoint method (eq)
(Starting value of x + final value of x) / 2
Perfectly inelastic
Quantity demanded doesn’t respond at all to changes in price (demand curve = vertical line
Perfectly elastic
Any price increase will cause the quantity demanded to drop to zero (demand curve = horizontal)
Elastic
Price elasticity of demand is greater than 1
Inelastic
Price elasticity of demand is less than 1
Unit-elastic
Price elasticity of demand is exactly 1
Total revenue
Total value of sales of a good or service; price x quantity sold
Cross-price elasticity of demand (eq)
% change in price of B
Cross-price elasticity of demand
Measures the effect of the change in one good’s price on the quantity demanded of the other good
Income elasticity of demand (eq)
% Change in income
Income elasticity of demand
Percent change in the quantity of a good demanded when a consumer’s income changes divided by the percent change in the consumer’s income
Income-elastic
Income elasticity of demand for a good is greater than 1
Income-inelastic
Income elasticity of demand for a good is positive but less than 1
Price elasticity of supply (eq)
% change in price
Price elasticity of supply
Measure of the responsiveness of the quantity of a good supplied to the price of that good
Perfectly inelastic supply
Price elasticity of supply is zero, so that changes in the price of the good have no effect on the quantity supplied (supply curve = vertical line)
Perfectly elastic supply
Quantity supplied is zero below some price and infinite above that price (supply curve = horizontal line)
