week 2 (chapter 3 and 4) Flashcards
comparative advantage
the ability to produce a good at a lower opportunity cost than another producer
absolute advantage
the ability to produce a good using fewer inputs than another producer (ex. time in terms of producing a good)
imports
goods produced abroad that are sold domestically
exports
goods produced domestically that are sold abroad
supply and demand
the market forces that determine the quantity and price of goods bought and sold
who influences demand?
buyers as a group determines the demand for the product
who influences the supply
sellers as a group determine the supply of a product
market
a group of buyers and sellers of a particular good or service
competitive market
market that has many different types of buyers and sellers, where each has an very minimal effect on the price
monopoly
markets that consist of one seller which controls the price
oligopoly
markets that have a small number of producers and sellers that control the prices
quantity demanded
amount of goods that buyers are willing and able to purchase at a particular price
- always downward sloping
law of demand
the claim that the quantity demanded of a good falls when prices rise
market demand
sum of individual demands for a good or service
what causes a shift in a demand curve?
- income
- prices of related goods
- expectations
- number of buyers
normal good
if the demand of the good falls when income falls and vice versa
- the more that you get money, you end up buying more or the demand increases
ex. food, clothing, appliances
inferior goods
if the demand of the good rises when income falls
ex. instant noodles, store brand products
substitutes
an increase in the price of one good leads to an increase in demand for another
ex. sprite and sierra mist, colgate and crest
complements
an increase in price of one good leads to a decrease in demand for another
ex. cereal and milk, pancakes and syrup
how will the quantity demanded shift?
in price ONLY
demand
how much of a good an individual wants to buy over the entire demand line
the income effect
the price of the good and the quantity of the good that you are going to buy is directly proportional to the demand of the good
ex. necessities, staple goods
- as your income changes, the quantity of that good will change with the income level
luxury goods
when income falls, the demand for the good falls
expectations
your expectations about the future may affect your demand for a good or service today
ex. if you expect that your income is going to increase you may spend eating out or on a new device
number of buyers
if there are less people, that means that there is going to be more sensitivity (or elasticity) to demand
law of supply
the claim that the quantity supplied of a good rises when the price rises
quantity supplied
amount of goods that sellers are willing and able to sell
- increases when price increases
- slopes upward
market supply
the sum of supplies for all sellers of a good or service
what causes a shift in the demand curve?
- technological innovations
- input prices
- taxes and subsidies
- expectations
- entry or exit of producers
- changes in opportunity costs
technological innovation
determines how much inputs are required to make a unit of output
- will go to the right
ex. reduction of labor after a mechanized ice cream dispenser
input prices
the supply of a good is negatively related to the price of the inputs used to make the good
wages and raw materials
- a fall in the input prices makes production more profitable at each output price, so firms supply a larger quantity at each price
taxes and subsidies
a subsidy on production makes sellers willing supply a greater quantity at a given price, or the subsidy allows producer to sell a given quantity at a lower price
tax to producers means an increase in production costs
a subsidy on production lowers costs and increases supply
ex. when the us decreases its cotton subsidies, us cotton supply decreases
expectations
a change in producers expectations about profitably will affect supply curve
ex. events in the middle east lead to expectations of higher prices. in response, owners of texas oilfields reduce supply now and save inventory to sell later at the higher price
will shift to the left
entry or exit of producers
as producers enter and exit the market, the overall supply changes
entry implies more sellers in the market increasing supply
exit implies fewer sellers in the market decreasing supply
change in opportunity costs
inputs used in production have opportunity costs, and sellers will choose to use those inputs where profit is the highest
sellers will supply less of a good if the price of an alternate good using the same inputs rises and vice versa
equilibrium
situation in which the market price has reached the level at which quantity demanded equals the quantity supplied
only one price
surplus
quantity supplied is greater than quantity demanded
- prices would have to go lower until they reach equilibrium
shortage
quantity demanded is greater than quantity supplied
- suppliers would have to ration out their good
what happens when an increase in demand happens on a s&d curve?
the equilibrium would change to a higher price and quantity
what would happen to a supply and demand curve is there was a decrease in demand?
causes the equilibrium to change to a lower price and lower quantity
what would happen to the supply and demand curve if there was an increase in supply?
causes the equilibrium to change to a lower price and higher quantity
what would happen if there was a decrease in supply on the supply and demand curve?
causes the equilibrium to change to a higher price and a lower quantity
change in supply
shift in the supply occurs occuring because a non price determinant of supply changes
change in the quantity supplied
movement along the actual line when price changes
change in demand
a shift in the demand curve occurring when a non price determinant of demand changes
change in the quantity demanded
a movement along a fixed demand line that occurs when price changes
law of supply and demand
the price of any good adjusts to bring the quantity supplied and quantity demanded of that good into balance
three steps to analyzing changes in equilibrium
- decide the determinant of demand or supply
- see how it shifts the curve
- use the model to see what happens when it does shift
