Unit 2A - Supply and Demand Flashcards
Demand
The quantities of a good/service people are willing & able to purchase at their given prices
Demand Schedule
Table showing quantities of a good/service people are willing & able to purchase at their given prices over a specific time period
Demand Curve
Graph showing quantities of a good/service people are willing & able to purchase at their given prices over a specific time period
Law of Demand
As the price of a product falls, the product’s quantity demanded increases [other things being equal]
Reasons for Law of Demand:
- More people are able to purchase the product
- People can purchase more of the product than before at the same cost (aka increase in purchasing power)
- People will switch from similar goods to the cheaper good
Market
People who want and are able to buy a product
Market Size Effect
Demand increases as the market size increases
Income Effect
Demand increases as incomes increase
Substitution Effect
Demand changes as one good is substituted for another
Normal Good
A good in which a higher quantity is purchased as income rises
Inferior Good
A good in which a smaller quantity is purchased as income rises
Substitute Good
Goods that are used to replace each other
Complementary goods
Goods that are used jointly
Independent good(s)
Goods whose demands are not related
↑Y (income)
↑D (demand) for normal goods, ↓D for inferior goods
↑ P (price) Sub. X
↑D for good Y; ↓D for good X
↑P Complementary X
↓D for Y
↑No. of Consumers of Y
↑D of Y
↑T (Tastes)
↑D of Y
↑A (Advertising)
↑T
↑P after time
↑D until ↑P
↑Y after time
↑D
Elasticity of Demand
The change of quantity demanded by the change of determinants of demand
Elastic Demand
- % change in quantity demanded > price change %
- Companies see increase in revenue by decreasing price
Inelastic Demand
- % change in quantity demanded < price change %
- Companies see increase in revenue by increasing price
Unitary Elastic Demand
% change in quantity demanded = price change %
↓P (Price) → ↑R (Revenue)
Cost of output must be determined for profit
↑P → ↑R
Total cost decreases from less output (justified by profit)
Price Elasticity of Demand
The change of quantity demanded by the change of the price of a product
Formula: Price Elasticity of Demand
PED = Qd/P = (q2 - q1/q1)/(p2 -p1/p1), where p1 and q1 are the original quantities
Availability of substitutes to elasticity of demand
Price elasticity will be greater if many substitutes are available for it
Importance in budgets
The importance a good has on household budgets will affect the change of the rate of purchase of that good by the change of that good’s price
Time
- In the short term, buyers may not find substitutes and do not change consumption habits.
- In the long term, consumers may hold more elastic demand.
Supply
The quantities of goods/services sellers are willing to sell at various possible prices
Supply Schedule
Table showing the quantities of goods/services sellers are willing to sell at various possible prices at a period of time
Expectations and Demand
Expectations affect demand by time of price changes and time of income changes
Law of Supply
As the price of a product falls, other things being equal, the quantity offered for sale decreases.
Supply Curve
Graph showing the various quantities of a good/service sellers are willing and able to sell at different prices
Substitutes in Production
Goods produced as alternatives to each other
Complements in Production/Joint Products
Goods that are produced together
Supply Shifter
A non-price determinant of supply
↑No. of Suppliers
↑S (Supply)
↑C (Input Costs)
↓S
↑Efficiency / Technology
↑S
↑Taxes
↓S
↑Subsidies
↑S
↑Price of Sub. X
↓S of Y
↑Price of Comp. X
↑S of Y
↑P after time
↓S until ↑P
Surplus
The excess of quantity supplied over quantity demanded
Shortage
The excess of quantity demanded over quantity supplied
Market Equilibrium
The balance of supply and demand
Price Equilibrium
The price equating quantity demanded and quantity supplied
Quantity Equilibrium
The quantity traded at the price equilibrium of a market
Theory of Market Adjustment
Prices change to meet market equilibrium
↑D
↑EP and EQ
↑S
↓EP + ↑EQ
Causality
The relation of cause and effect
Carrying Capacity
No. of people the Earth’s resources can support indefinitely if its resources are efficiently managed
Drawing Down
Taking or abusing natural resources that should be available for future generations
Sustainable Development
Economic development accounting for the ability of future generations to meet economic, social and environmental needs
Externality
Side effect of production or consumption of a good/service experienced by a third party [not involved in the trade or production]
Positive Externality/Spillover Benefit
Benefit to a third party from consumption and/or production of a good or service
Negative Externality/Spillover Cost
Cost suffered by a third party from consumption and/or production of a good or service
Subsidy
Payment made by the government to producers or consumers on the condition of a desired outcome
Pigouvian Tax
A tax levied on a method of production that causes negative externalities
Ratcheting Mechanism
A Pigouvian tax steadily increasing until an external cost is reduced to an acceptable level
Regulation and Pros
- A rule maintained by an authority
- Can prevent production of goods that lead to toxic by-products
- Can protect critical or renewable resources
Subsidy Pros and Cons
- Pro: Increases supply of a desired good
- Con: Producers and consumers of the good aren’t held accountable for the external cost
Advantages of Tax
- Allows the market price to reflect the external cost of production
- Causes some producers to adopt technology that reduces external cost
- Makes external cost efficient
Disadvantages of Tax
- Can be difficult for the government to set a tax that makes up the difference between marginal private cost and marginal social cost.
- Does not directly prevent negative externalities from taking place
Price Floor
Point beyond which price isn’t allowed to fall
Price Ceiling
Point beyond which price isn’t allowed to rise
Excise Tax
Tax imposed on a specific domestically produced good
Black Market
A market in which products are sold illegally above the price set by law
Efficacy of Price Floors and Ceilings
- Price ceilings are effective if they are set below the price equilibrium
- Price floors are effective if they are set above the price equilibrium
Government Responses to Shortages and Surpluses
Governments may respond to shortages by rationing and to surpluses by purchasing the remainder
Supply and Demand during Set Prices
Both quantity demanded and quantity supplied are based on the set price, causing a surplus for price floors or shortage for price ceilings.
PED by point on demand curve
Price elasticity of demand is closer to infinity at the left of the curve and closer to 0 at the right of the curve
The Increased Price a Consumer Pays from an Excise Tax
C.PriceIncrease = NewPriceEquilibrium - OldPriceEquilibrium
The Increased Price a Producer Pays from an Excise Tax
P.PriceIncrease = (OldPriceEquilibrium + Tax) - NewPriceEquilibrium
Supply Curve from Excise Tax
Increase in cost from excise tax directly represented by upward movement of supply curve by price.
Market Failure
When a free market produces an outcome deemed unfair or inefficient
Cons of Regulations
- Regulations may still be broken if punishment or fine costs less than preventing external cost
- Can be difficult and expensive to administer; less effecient due to their compliance being built without market pricing mechanisms
Examples of Market Failure
- Externalities
- Income inequality
- Abuse of monopoly power
- Lack of public goods
Market Disequilibrium
An imbalance of supply and demand
