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
