Week 2 - Markets, Supply and Demand Flashcards
Demand curve
A graph showing how demand for a good or service changes with price.
It is generally sloping downwards.
Giffen Good
A good with an upwards sloping demand curve - as price increases, demand increases.
Very rare in real life.
Substitution effect
As price of a good or service increases consumers swap to cheaper substitutes
Income effect
As prices of a good or service increases less consumers can afford it.
Normal good
A good where as income increases, demand for the good also increases.
Inferior good
A good where as income increases, demand for the good decreases.
Substitution effect for normal and inferior goods
For a normal good, as price falls demand increases
For an inferior good, as price falls, demand increases
Income effect for normal and inferior goods
For a normal good, as price falls demand increases
For an inferior good, as price falls, demand falls
Buyers reservation price
The maximum cost a consumer is willing to pay for a good/service
Supply curve
A graph showing how supply for a good or service changes with price.
It is generally sloping upwards.
Sellers reservation price
Minimum price a seller is willing to sell a good/service for.
Market equilibrium
A state of the market where there is no pressure for a quantity or price of a good to change. Occurs when supply=demand.
What happens when there is excess demand
Buyers want to buy but cannot so offer higher prices.
Upward pressure on prices.
What happens when there is excess supply
Sellers want to sell but cannot so offer lower prices.
Downward pressure on prices.
Price ceiling
A maximum limit introduced on the price of a good/service
Price floor
A minimum limit introduced on the price of a good/service
Change in quantity demanded/supplied
Refers to a change along a given demand curve.
Caused by changes to price.
Change in demand/supply
Refers to the creation of an entirely new demand curve.
Caused by non-price factors.
Factors that shift demand
Change in income
Change in preference
Change in number of buyers
Change in expectation of future prices - could buy sooner or wait on buying depending on if you expect future price to decrease or increase.
Factors that shift supply
Weather
Change in expectations - could wait on selling or sell sooner depending on if you expect future prices to decrease or increase.
Change in number of sellers
How does changes in demand impact equilibrium price and quantity
Increase in demand causes increase in equilibrium price and quantity
Decrease in demand causes decrease in equilibrium price and quantity
How does changes in supply impact equilibrium price and quantity
Increase in supply causes decrease in equilibrium price and quantity
Decrease in supply causes increase in equilibrium price and quantity
