Unit 2 - Supply and Demand - DONE Flashcards
Demand
The ability and willingness to consume.
Law of Demand
As price goes up, quantity demanded decreases. and price therefore decreases. When price decreases, quantity demanded increases.
Inverse Relationship
Total Revenue
Money coming in
Price * Quantity of things
Profit
The output money made
Profit = total revenue - cost
Market Quantites
Sum of what all participants are buying at given price.
Determinants of Demand
- Population
- Incomes / wealth
- Price of subsitute goods
- Price of complementary goods
- Addiction
- Necessity
Quantity Demanded
Amount we consume at a given price
Supply
The producer’s ability and willingness to produce
Ability = ability in all ways except for monetary
Quantity Supplied
Amount we produce at a given price
Law of supply
As price increases, quantity supplied increases. As price decreases, quantity supplied decreases.
Direct relationship
Determinants of Supply
- Availibility of factors of production
- Tech
- Logistics
- Infastructure
- Taxes / subsidies
- Regulations
- Numbers of producers
- Subsitutes of production
- Complements of production (two products of same process –> beef + leather)
Subsitutes of production = other things producers could make
Demand curve goes higher
Demand increases
Demand curve goes lower
Demand decreases
Supply curve goes higher
Supply decreases
Supply curve goes lower
Supply increases
Point of Equilibrium
Quantity demanded = Quantity supplied
Qs < Qd
Shortage
Price back up to equilibrium
Qs > Qd
Surplus
Price back down to equilibrium
Equilibrium
Units of goods sold and the market price of said good
The reality of equilibrium
With changing supply and demand, we are almost never in equilibrium. We are always “trying” to reach this point.
Substituion Effect
The change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes
Income Effect
the change in the quantity demanded of a good that results from the effect of a change in the good’s price on consumers’ purchasing power
Elasticity
A measure of responsiveness that tells us how a dependent variable such as quantity responds to a change in an independent variable such as price
Elasticity of Demand
A measure of how consumers react to a change in price; percent change in quantity demanded divided by percentage change in price
Total Revenue Test
A test to determine elasticity of demand between any two prices: Demand is elastic if total revenue moves in the opposite direction from price; it is inelastic when it moves in the same direction as price (arms up!); and it is of unitary elasticity when it does not change when price changes.
Income elasticity of demand
A measure of how much the quantity demanded of a good responds to a change in consumers’ income, computed as the percentage change in quantity demanded divided by the percentage change in income
Cross-price elasticity of demand
A measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good
Complements
Two goods for which an increase in the price of one leads to a decrease in the demand for the other
Subsitutes
Two goods for which an increase in the price of one leads to an increase in the demand for the other (positive coefficients)
Normal Goods
Goods for which demand increases when income is higher and for which demand decreases when income is lower.
Inferior goods
Goods for which demand tends to fall when income rises.
