Week 2- Demand, Supply, and Market Equilibrium notes Flashcards
Market
A big bubble where buyers and sellers communicate. Buyers and sellers provide competition.
Demand-
Curve that shows amount of goods that people are WILLING and ABLE to purchase.
Law of Demand-
price falls, quantity demanded rises. Inverse relationship.
Marginal-
Utility-
Marginal- change
Utility- happiness.
Law of Diminishing Marginal Utility-
Consuming the same unit makes you less happy and satisfy.
Income effect-
If Purchasing Power increases, Price decreases.
Substitution effect-
As price increases, consumer seeks lower cost alternatives.
As income increases, consumer seeks for high quality goods and more expensive stuff.
Determinants of demand-
- Consumer taste.
- Amount of buyers in market.
- Consumer income (normal or inferior).
- Price related goods (substitute and complementary goods).
- Consumer expectations.
How to find Market demand-
By adding quantity demanded from all consumers at certain price to get market demand.
Change in demand?
Shift right= increase. Shift left= decrease in demand.
Normal goods-
Varies directly w/ incomes.
Inferior goods-
Varies inversely.
Substitute goods-
Replace other goods. Ex: Price of pepsi increase, you not going to buy pepsi anymore. Therefore, your demand for Coke increase.
Complement goods-
If price of a good goes up, price of related goods decrease.
Ex: Hotdog price increase, less people will buy hotdog buns.
Unrelated goods (independent)-
Goods not related to one another.
Consumer expectations-
If they expect price of goods increase in future, they will buy more today (more demand).
Change in Quantity demanded-
Movement along the line (up and down), not shift right or left.
Supply-
Goods that producers are WILLING and ABLE to purchase.
Law of Supply-
Direct relationship btwn Price and Quantity supplied. .
Market supply-
Find the sum of each individual suppliers at certain price, then add up together to find market supply.
Determinants of supply:
- Resources prices- high production price, supply decreases.
- Technology- increase in technology which lowers production cost= supply decreases.
- Taxes and subsidies- tax increase= supply decrease.
- Price of other goods- price of other goods increase, supply of original good decreases.
- Producer expectations- Farmers will hold supply and release in future if price increase. Factory will increase labor supply to meet future increase in price.
- Number of sellers- more sellers= more supplies.
Market equilibrium-
Competitive market w/ multiple sellers and buyers act independently, none of them can set price.
Equilibrium price-
Price where buyers and sellers match. Equilibrium aka Market Clearing Price.
Equilibrium quantity-
Quantity demanded = quantity supplied.
Rationing function of prices-
Ability for competition to force supply and demand into an equilibrium.
Productive efficiency-
Minimizes cost.
Allocative efficiency-
Mix of goods most valued by society. MB=MC
Price ceiling-
Set maximum legal price that seller may charge for services by gov’t. Causing shortage and Black Market.
Rent Control-
Gov’t set price ceiling, causing shortage on renting places.
Price Floor-
Minimum price fit by gov’t. Causing surplus due to the fact that there’s more supplies than demands.
Gov’t can help by: restrict supply or purchase those surpluses.
Price floor and Price ceiling causes-
Failures to allocate efficiency.
How to calculate Consumer surplus-
Willing to pay - amount actually pay.
Producer surplus-
Amount that seller is paid for a good - cost of production.
Social surplus (Total Surplus)-
Sum of Consumer surplus and producer surplus.
Deadweight loss-
Loss in total surplus that occurs when economy produces at an insufficient quantity.
Alfred Marshall-
A famous economist.
