Econ 102 Test 1

Market

a group of buyers and sellers of a particular product

Perfectly competitive market

• all goods are exactly the same

• buyers and sellers are so numerous that no one can affect price - each is a price taker

• everyone accepts market prices and have no desire to change it

Quantity demanded

The amount of the good that buyers are willing and able to purchase

Law of demand

the claim that the quantity demanded of a good falls when the price of the good rises, other things equal

Demand schedule

a table that shows the relationship between the price of a good and the quantity demanded

obeys law of demand

when graphed, creates a negative slope

Market demand

the sum of the quantities demanded by all buyers at each price

Demand curve

Shows how price affects quantity demanded

Non-price determinants of demand

Shift the D curve

Change in price causes a

Movement along the demand curve

number of buyers

an increase in buyers increases the quantity demanded at each price which shifts the D curve to the right

a decrease in buyers decreases the quantity demanded at each price, shifts the D curve to the left

How does income relate to demand

For normal goods:

An increase in income increases quantity demanded at each price, shifts D curve to the right

A decrease in income decreases quantity demanded at each price, shifts D curve to the left

For inferior goods:

An increase in income decreases quantity demanded at each price, shifts D curve to the left

A decrease in income increases quantity demanded at each price, shifts D curve to the right

Prices of related goods: substitutes

Substitutes:

An increase in the price of good A increases the demand for good B

A decrease in good A decreases the demand for good B.

When goods are substitutes, people want to buy the less expensive one

Prices of related goods: complements

Complements:

Goods that are bought/used together

An increase in price of good A will cause a decrease in demand for good B

A decrease in the price of good A will cause an increase in demand for good B

Tastes

Anything that positively or negatively draws attention to a good will increase or decrease demand and shift the D curve right or left, respectively

Expectations

Expectations of future circumstances can affect consumer’s buying decisions now, leading to an increase or decrease in demand for a product

Quantity supplied

The amount of a good that sellers are willing and able to sell

Law of supply

Quantity supplied will increase when the price increases, all other things equal

Supply schedule

A table that shows the relationship between price and quantity supplied; as price goes up, quantity supplied will increase

When graphed, creates a positive slope

Market supply

Sum of the quantities supplied by all sellers at each price

Input prices

Ex. wages, price of raw materials, parts

A fall in input prices makes production more profitable, so quantity supplied increases at each price, shifting S curve to the right

An increase in input prices decreases quantity supplied at each price, shifting S curve to the left

Technology

Better technology equals more quantity supplied at each price, shifts S curve to the right

Number of sellers

An increase in sellers leads to more quantity supplied at each price, shifting the S curve to the right

A decrease in sellers leads to less quantity supplied at each price, shifting the S curve to the left

Prices of other goods

If the price of good A increases, a producer of good B may start producing good A to obtain profits which will shift the supply curve of good A to the right

Expectations of future prices

If the price of a good is expected to rise in the future, sellers may hold off on supplying it until the future

If the price of a good is expected to decrease, sellers may try to sell more now

Shifts curve to the left and right respectively

Taxes and Subsidies

Higher taxes increase per-unit costs, shifting S curve to the left

Subsidies decrease per unit costs, shifting S curve to the right

Government restrictions

Quotas (limits) and licensure lead to a shift left in the S curve

Price

Movement along the S curve

Equilibrium price

where quantity supplied and quantity demanded intersect

Surplus

Quantity supplied is greater than quantity demanded

Leads to a decrease in price; Qd increases and Qs falls, prices fall until market reaches equilibrium

Shortage

Quantity demanded exceeds quantity supplied

Sellers will increase price which decreases Qd and increase Qs until market reaches equilibrium