Unit Two Flashcards
Homogenous
Products that are exactly the same (ex. salt, gold)
Heterogenous
Products that are differentiated (ex. Coke v Pepsi)
How do you know if a market is competitive
People could buy elsewhere
Price starts to hover around a certain value
Why do competitive markets work
Many buyers and sellers
Product is the same
Information known by all
Supply and demand graph (key factors)
Price is on the y axis, quantity is on the x axis
Quantity is dependent on price
Slope = run/rise
Endogenous variable
A variable that is inside the model (ex. price)
Exogenous variable
A variable that is outside the model (ex. technology)
What determines the value of a good
Quality How much people want it Scarcity Competition Production costs Need Process
Quantity demanded
The amount consumers are willing and able to purchase at a given price
Quantity demanded and price have a negative relationship
Demand curve
Price on y axis, quantity on x axis, demand = downward sloping line
Law of demand
Quantity demanded decreases when price increases
Quantity demanded increases when price decreases
Why the demand curve is downward sloping
Income effect, substitution effect, marginal utility per dollar
Income effect
As prices rise, consumers can not afford to buy as much
Substitution effect
As prices rise, consumers buy substitutes
Marginal utility per dollar
As prices rise, consumers can get less marginal utility per dollar (value)
Determinants of demand
Non-price things affect people’s willingness and ability to pay (exogenous variables)
Things that will shift the demand curve
Changes in preferences, income, population, substitute goods, complements, expectations of consumers
Shifts in quantity demanded
Caused by change in price (usually due to a shift in supply)
Go from one point on the demand curve to another point on the demand curve
Shifts in demand
Caused by determinant (from list)
Whole line of demand shifts to the right or left
Quantity supplied
The amount producers are willing and able to produce and sell at a given price
Quantity supplied and price have a positive relationship
Supply curve
Price on y axis, quantity supplied on x axis, upward sloping line
Law of supply
Quantity supplied increases when price increases
Quantity supplied decreases when price decreases
Determinants of supply
Non-price things that encourage/discourage suppliers (exogenous variables)
Change in technology, input prices (marginal cost), producer expectations, prices of other goods, government policies (subsidies), number of suppliers, the production of a jointly-produced good (ex. beef and leather)
Subsidy
Financial assistance to a business
Most subsidies are given by the government (corn, education, etc.)
Tax
Increase price, sin tax
Shifts in quantity supplied
Caused by change in price (usually due to a shift in demand)
Endogenous
Goes from one point on the supply curve to another point on the supply curve
Shifts in supply
Caused by determinant
Exogenous
Entire supply line moves left or right
Equilibrium
The point where supply = demand is known as the equilibrium
This point corresponds to the “equilibrium price” and “equilibrium quantity”
The equilibrium price and equilibrium quantity are socially optimal/allocatively efficient
At equilibrium quantity, quantity demanded = quantity supplied
Socially optimal
Best for society, can sell and buy goods at equilibrium price
Allocatively efficient
Resources distributed and used without waste, supply = demand, perfect amount of good
In a free market
If quantity supplied is greater than quantity demanded then price will fall until it hits equilibrium
If quantity demanded is greater than quantity supplied then price will rise until it hits equilibrium
Synonyms for equilibrium price
Market clearing price
Market price
Socially optimal price
Shifts
Any shift in supply and/or demand can change the equilibrium price and/or quantity
A shift in supply causes a change in quantity demanded (and vice versa)
Increase
Rightward shift
Substitutes
Two goods that provide similar purpose or utility (ex. nalgene and camelbak)
Complements
Two goods that are consumed together (ex. peanut butter and jelly)
Normal good
Any good for which consumption increases as people’s income increases (ex. fresh fruit)
Inferior good
Any good for which consumption increases as people’s income decreases (ex. Ramen)
Joint production
Two goods that are produced together
Usually a function of a byproduct
Ex. sugar and molasses, beef and leather
Quantity supplied of one good increases —> supply of the other good increases
Giffen good
A good where consumption increases as price rises, defies law of demand
If price goes up so does quantity demanded, because the income effect > substitution effect
Synonym for indeterminate
Ambiguous
Increase in demand, increase in supply
Price ambiguous, quantity increase
Demand increase, supply decrease
Price increase, quantity ambiguous
Demand decrease, supply increase
Price decrease, quantity ambiguous
Demand increase, supply decrease
Price indeterminate, quantity decrease
