Chapters 3 & 4 - Supply and Demand Analysis

Practice flashcards covering the fundamentals of supply, demand, equilibrium, shifts, price rationing, and price controls from Chapters 3 and 4.

What is the definition of demand according to Chapter 3?

The quantities of goods or services that people will purchase at various prices, other things being constant.

What does the assumption of ceteris paribus mean?

"Other things equal", which is the assumption that nothing changes except the factor(s) being studied.

What does the Law of Demand state?

When prices go down people buy more, and when prices go up people buy less.

How is market demand calculated from individual demands?

By adding the demands of all consumers in the marketplace together, without averaging them.

What is the difference between a normal good and an inferior good?

A normal good is one for which demand rises as income rises, whereas an inferior good is one for which demand falls as income rises.

How do substitute goods and complement goods react differently to price changes?

For substitutes, a price change in one good shifts demand for the other in the same direction; for complements, a price change in one causes an opposite shift in demand for the other.

What determines a change in demand versus a change in quantity demanded?

Shifts in non-price factors affect demand, whereas a change in price affects quantity demanded.

What does the Law of Supply state?

At higher prices a larger quantity will be supplied, and at lower prices less is supplied.

How do business taxes and subsidies shift the supply curve?

Business taxes only shift supply to the left (decrease), while subsidies only shift supply to the right (increase).

What is market equilibrium?

The state when quantity demanded equals quantity supplied, occurring where the demand curve intersects the supply curve.

How are surplus and shortage defined?

A surplus occurs when supply is greater than demand, and a shortage occurs when demand is greater than supply.

What is voluntary exchange?

The act of trading, done on a mutually agreed basis, in which both parties agree and benefit.

What are platform firms?

Companies that link people to other individuals, connecting buyers to producers.

What is the shift shortcut rule when both supply and demand shift in the same direction?

There is a definite shift in quantity, while price is indeterminate.

What is the shift shortcut rule when one curve increases and the other decreases?

There is a definite shift in price, while quantity is indeterminate.

What is price rationing?

The process where price rations a good to demanders who are willing and able to pay the highest price.

What are the non-price rationing methods mentioned in the notes?

First come, first served (queuing); political power/force (government decision); random assignment (college housing); and coupons (food stamps).

What is a price ceiling and what effect does it always have on a market?

A legal maximum price that may be charged for a good or service (such as rent, insulin, or epi-pens), which will always cause a shortage.

What is a price floor and what effect does it always have on a market?

A legal minimum price below which a good or service may not be sold (such as minimum wage or agricultural crops), which will always cause a surplus.