Week 3: Demand and Supply Flashcards
What is a competitive market?
It has many independent buyers and sellers so no single buyer or seller can influence the price.
What is the money price?
The number of dollars given up in exchange for a good or service
What is the relative price?
An opportunity cost and the ratio of a price of one good to another (money price of a good/money price of a “basket” of all goods or price index)
What is the law of demand?
Other things remaining the same, the higher the price of a good, the smaller is the quantity demanded; the lower the price of a good, the greater is the quantity demanded.
Why does a higher price reduce quantity demanded?
- Substitution effect- opportunity cost (relative price) of the good increases so there’s an incentive to switch to a substitute
- Income effect- price rises relative to income so certain goods become unaffordable and the quantities demanded falls
What are the ways that the demand can be illustrated?
Demand curve and demand schedule- graphical and tabular representations of the relationship between the quantity demanded of a good and its price
What is the difference between a change in demand and a change in quantity demanded?
a) A change in demand shifts the demand curve to the right or to the left if the price remains constant but some other influence on buying plans changes.
b) A change in quantity demanded creates a movement along the demand curve if the price changes but the other influences on buying plans remain constant.
What are the six factors that bring changes in demand?
- Price of related goods- demand increases as the price of a substitute increases and demand decreases as the price of a complement increases
- Expected future prices- if the price of a good that can be stored is expected to rise, the demand for it today increases
- Income- demand increases as income increases for normal goods and demand decreases as income increases for inferior goods
- Expected future income and credit- when these become easier to get, current demand for a normal good increases
- Population- the larger the population, the greater is the demand for all goods and services
- Preferences- depends on the value people place on each good or service
What is the law of supply?
Other things remaining the same, the higher the price of a good, the greater the quantity supplied; the lower the price of a good, the smaller the quantity supplied.
What are the ways that supply can be illustrated?
Supply curve and supply schedule- graphical and tabular representation of the relationship between the quantity supplied of a good and its price
What is the difference between a change in supply and a change in quantity supplied?
a) A change in supply shifts the supply curve to the right or to the left if the price remains constant but some other influence on buying plans changes.
b) A change in quantity supplied creates a movement along the demand curve if the price changes but the other influences on buying plans remain constant.
What are the six factors bring changes in supply?
- Prices of factors of production- if the price of a factor of production increases, minimum supply price rises and supply decreases
- Prices of related goods produced- price of a substitute rises so the substitute’s supply rises (switches production); price of a complement rises so supply also increases
- Expected future prices- if the price of a good is expected to rise, return from selling it in the future rises, so current supply decreases and future supply increases
- Number of suppliers- supply of a good increases as the number of firms that produce it increases
- Technology- new method of production lowers the cost of producing a good and increases its supply
- State of nature- depends on natural forces that influence production
When does market equilibrium occur?
When price adjusts to balance buying plans and selling plans
What is the equilibrium price and the equilibrium quantity?
a) Equilibrium price is the price at which quantity demanded is equal to the quantity supplied.
b) Equilibrium quantity is the quantity bought and sold at the equilibrium price.
When does a shortage and a surplus occur?
a) A shortage occurs when the price is below equilibrium (QD>QS).
b) A surplus occurs when the price is above equilibrium (QS>QD).
How do market forces affect the price when there is a shortage and a surplus?
a) Shortage- market forces increase the price; demand decreases and supply increases
b) Surplus- market forces decrease the price; demand increases and supply decreases
What is the equation of a demand curve that is a straight line?
P= a-bQD (inverse demand function)
where a is the choke price and b is the slope
What is the equation of a supply curve that is a straight line?
P= c+dQS (inverse supply function)
where c is the choke price and d is the slope
