Unit 2: Supply and Demand Flashcards
Competitive market
A market where there are many buyers and sellers, so each has a negligible (insignificant) impact on the market price, since the other sellers are offering similar products
- many buyers and sellers
- unorganized
Non-competitive market
- One seller
- monopoly
- organized
Why do competitive markets work?
They keep up with supply and demand
Perfectly competitive markets
- Goods being offered for sale are all the same
- There are so many buyers and sellers that so individual has an impact on the market price
Ex. The wheat industry
Monopoly
Markets where there is only one seller, who sets the price
Ex. A town which only has one TV cable company
Oligopoly
Few sellers that do not compete aggressively
Ex.airline routes
Monopolistically competitive
Many buyers and sellers, who offer slightly different products
Ex. Magazine companies
What determines the value of something?
- how much it’s worth to make
- the skill involved in making it
- how much someone is willing to pay for it
- quantity
- quality
- popularity
- competition
- OC for people making it
Fundamental value
How much something is really worth
Quantity demanded
Is QD positively or negatively related to price?
The amount of a good buyers are willing and able to purchase
NEGATIVELY related to price because as the price rises, QD decreases and as QD rises, the price falls
Law of demand
Other things equal, when the price of a good rises, the QD falls and when the price decreases, QD increases
Why the demand curve slopes down
- Income effect: as prices rise, people can’t afford as much
- Substitution: when the price of one thing rises, people will find substitutes
- Marginal utility per dollar: as the price increases, people feel less satisfaction from paying
Endogenous variable
A variable inside the model
Ex. Price
Exogenous variable
Variable outside the model
Ex. Taxes, rent, war,
Things that will shift the demand curve to the RIGHT
- increased preference
- increased income (normal good)
- decreased income (inferior good)
- increased population
- increase in price of substitute good
- decrease in price of complements
- expectations of consumers
Things that shift the demand curve LEFT
- decrease in preference
- decrease in income (normal good)
- increase in income (inferior good)
- decrease in population
- decrease in price of substitute goods
- increase in price of complements
- expectations of consumers
Shifts on QD
Change in price
Moves ALONG the curve
Normal good
All things equal, a good where and increase in income leads to and increase in demand
Inferior good
All things equal, a good where an increase in income leads to a decrease in demand
Complements
Goods where an increase in price of one leads to an increase in price for the other
Goods are consumed together
Ex. PB and J
Substitutes
2 goods where an increase in price of one leads to a decrease in demand for the other
2 goofd that provide similar purpose or utility
Quantity supplied
The amount sellers are willing and able to sell
Law of supply
All things equal, the quantity supplied of a good rises when the price rises and falls when the price falls
Are QS and price positively or negatively related?
POSITIVELY
Things that shift the supply curve to the RIGHT
- increase in technology
- decrease in input prices
- producer expectations
- government policies (increase in subsidies)
- increase in number of suppliers
Things that shift the supply curve to the LEFT
- decrease in technology
- increase in input prices
- producer expectations
- government policies (taxes)
- decrease in number of suppliers
Shifts in quantity supplied
Change in price (usually due to a shift in demand)
Moves ALONG the curve
Subsidy vs. Tax
Financial assistance given by the government
Shifts curve to the RIGHT
Tax shifts curve to the LEFT
Joint production
2 goods that are usually produced together
Usually a function of a buy product
ex. sugar and molasses
As the QS of one increases, the supply of the other good also increases
Giffen good
Any good for which consumption increases as its price increases
Goes against the law of demand
Veblen good
A good for which a person’s quantity demanded increases with price
price shows greater status
If demand and supply both increase, what happens to price and quantity?
Pride: indeterminate
Quantity: increase
If demand and supply both decrease, what happens to price and quantity?
Price: indeterminate
Quantity: decrease
If demand decreases and supply increases, what happens to price and quantity?
Price: decrease
Quantity: indeterminate
If demand increases and supply decreases, what happens to price and quantity?
Price: increase
Quantity: indeterminate
If nations specialize according to their CA and engage in international trade with each other, each nation can…
Consume outside of its production possibilities curve
PPF is a limit of production based on LLC of a nation, it can’t produce outside of its curve but with trade it can consume
