Supply and Demand

What is demand?

The amount of a product that someone is willing and able to buy.

What are the two variables that affect the calculation of demand?

Price of a product and quantity available at a given point in time.

What does the term 'Ceteris Paribus' mean in economics?

It assumes that all other factors remain constant when analyzing the effect of price changes.

What is the Law of Demand?

Quantity demanded varies inversely with price; as prices decrease, demand increases.

What shape does the demand curve typically take?

The demand curve is downward sloping.

What is a demand schedule?

A table that shows the quantity demanded at different prices.

What is marginal utility?

The extra usefulness or satisfaction gained from consuming one more unit of a product.

How does marginal utility affect demand?

As satisfaction decreases with additional consumption, consumers are willing to pay less.

What is a market demand curve?

A curve that represents the quantities demanded by all consumers in the market.

What happens to demand when prices are lower?

Consumers tend to buy more when prices are lower.

What is the relationship between price and quantity demanded?

They have an inverse relationship; as price increases, quantity demanded decreases.

What does a demand curve graphically represent?

The amount a consumer will purchase over a range of prices.

What is utility in the context of demand?

The usefulness or satisfaction derived from consuming a product.

How can advertisements influence demand?

They make products more appealing, potentially increasing the quantity demanded.

What is an example of a factor that is not considered in Ceteris Paribus?

The availability of other movies or ease of purchasing tickets.

What is the significance of the demand curve in microeconomics?

It visually represents consumer behavior and helps predict how changes in price affect demand.

What leads to a change in quantity demanded?

Price changes lead to movement along the demand curve.

What happens to quantity demanded when price goes up?

Quantity demanded decreases.

What happens to quantity demanded when price goes down?

Quantity demanded increases.

What is the income effect?

Change in quantity demanded due to a change in price that alters consumers' income.

How does a price drop affect consumer spending?

Consumers have extra income to spend, potentially increasing quantity demanded.

What is the substitution effect?

Change in quantity demanded due to a change in relative prices, leading consumers to switch to less expensive products.

What is the difference between a change in quantity demanded and a change in demand?

Change in quantity demanded is movement along the curve; change in demand is a shift of the curve.

What are the five demand shifters?

1. Consumer income 2. Consumer tastes/preferences 3. Future expectations 4. Number of consumers 5. Price of related goods (substitutes/complements)

How does consumer income affect demand?

Higher income generally leads to increased consumption.

What can change consumer tastes?

Ads, peer pressure, seasons, and product popularity can shift consumer preferences.

How do future expectations influence demand?

Expectations about future prices or product releases can shift demand left or right.

What happens to demand if more consumers enter the market?

Demand shifts to the right.

What is the effect of substitutes on demand?

If the price of a substitute increases, the quantity demanded of the original product increases.

What are complements in economics?

Products that are used together; an increase in the price of one leads to a decrease in the quantity demanded of the other.

What is an example of a change in demand due to consumer expectations?

If consumers expect a new tech product to be released, they may delay purchases, shifting demand left.

What happens to demand if a product becomes less popular?

Demand shifts to the left.

How does the number of consumers leaving the market affect demand?

Demand shifts to the left.

What is the relationship between the price of butter and the quantity demanded of margarine?

If the price of butter increases, the quantity demanded of margarine increases.

What is the impact of a bad crop year on consumer behavior?

Consumers may stock up on goods, shifting demand to the right.

What is demand elasticity?

The extent to which a change in price causes a change in quantity demanded.

What are the three types of demand elasticity?

Elastic demand, inelastic demand, and unit elastic demand.

What characterizes elastic demand?

A change in price causes a larger change in quantity demanded.

Provide an example of elastic demand.

Fruits and vegetables, where consumers can easily switch to alternatives.

What characterizes inelastic demand?

A change in price causes a relatively smaller change in quantity demanded.

Provide an example of inelastic demand.

Cancer drugs, where quantity demanded does not significantly change with price variations.

What is unit elastic demand?

A proportional change in price and quantity demanded.

How do you measure elasticity of demand?

By comparing the percentage change in quantity demanded to the percentage change in price.

What does the total expenditure test help determine?

It estimates elasticity by comparing the direction of price change to the direction of change in total expenditure.

What indicates elastic demand in the total expenditure test?

When a change in price and a change in revenue (expenditures) move in opposite directions.

What indicates inelastic demand in the total expenditure test?

When a change in price and a change in revenue move in the same direction.

What happens in unit elastic demand according to the total expenditure test?

Total receipts do not change with a change in price.

What is perfectly inelastic demand?

Quantity demanded does not change at all, regardless of price changes.

What is perfectly elastic demand?

Consumers will only buy at one specific price and are extremely sensitive to price changes.

What are the determinants of demand elasticity?

1. Can the purchase be delayed? 2. Are adequate substitutes available? 3. Does the purchase use a large portion of income?

If a purchase can be delayed, what type of demand is it likely to be?

Elastic demand.

If there are many substitutes available for a good, what type of demand is it likely to be?

Elastic demand.

If a purchase uses a large portion of income, what type of demand is it likely to be?

Typically elastic demand.

If a good is a necessity and cannot be delayed, what type of demand is it likely to be?

Inelastic demand.

What is the impact of raising prices on revenue if demand is elastic?

Raising prices might lead to lower revenue.

What is the impact of lowering prices on revenue if demand is inelastic?

Lowering prices may lead to a decrease in revenue.

What type of elasticity is indicated if revenue remains the same despite price changes?

Unit elastic demand.

What is supply in economics?

The amount of a product that producers are willing and able to sell at all possible prices in the market.

What does a supply schedule represent?

A listing of the quantities of a particular product that a producer would supply at all possible prices.

What is a supply curve?

A graphical representation of the supply schedule.

What does the law of supply state?

As price rises, producers will offer more of a product for sale.

What is the market supply curve?

Quantities offered at various prices by all firms that sell the same product in a given market.

What is the difference between quantity supplied and change in supply?

Quantity supplied is a specific amount offered for sale at a given price, while change in supply refers to a change in the amounts offered for sale at each price in the market.

What are the factors causing a change in supply?

Cost of resources, productivity, technology, taxes, subsidies, regulations, number of sellers, and supplier expectations.

How does an increase in the cost of resources affect supply?

If costs go up, supplier profits go down, leading to a leftward shift in supply.

What impact does productivity have on supply?

Higher productivity shifts supply to the right, while lower productivity shifts it to the left.

How does technology influence supply?

Better technology can lower production costs, shifting supply to the right; worse technology shifts it to the left.

What effect do taxes have on supply?

Higher taxes reduce profitability and shift supply to the left, while lower taxes increase profitability and shift supply to the right.

What is a subsidy?

A government payment to a business to encourage or protect a certain economic activity.

How do regulations affect supply?

Increased regulations typically raise costs, shifting supply to the left; fewer regulations lower costs, shifting supply to the right.

What happens to supply when the number of sellers increases?

An increase in the number of sellers shifts supply to the right.

How do expectations about future prices affect current supply?

If firms expect higher future prices, they supply less today (shift left); if they expect lower prices, they supply more today (shift right).

What is supply elasticity?

A measure of the degree to which quantity supplied responds to a change in price.

What characterizes elastic supply?

A change in price causes a proportionally larger change in quantity supplied.

What characterizes inelastic supply?

A change in price causes a proportionally smaller change in quantity supplied.

What is unit elastic supply?

A change in price leads to a proportionate change in quantity supplied.

What determines the elasticity of a producer's supply curve?

The ability of a firm to adjust to new prices quickly determines supply elasticity.

Which types of products typically have elastic supply?

Products like toys, candy, coffee shops, bakeries, streaming services, and rideshare services.

Which types of products typically have inelastic supply?

Products like homebuilders, electric utilities, ship builders, aged goods (cheese, wine), and railroads/airlines.

What is the production function?

It shows how total output changes when the amount of a single variable input changes, typically labor.

What does ceteris paribus mean in the context of production?

It means all other inputs are held constant while changing a single variable input.

What is the short run in production?

A production period so brief that only the amount of the variable input can change, while capital remains constant.

What is the long run in production?

A production period long enough for a firm to adjust quantities in all productive resources, including capital.

Define total product.

The total output or production by a firm.

What is marginal product?

The extra output or change in output due to the addition of one more unit of input, such as a worker.

What is the marginal product of adding the first worker?

7 units of output.

What is the marginal product of adding the second worker?

13 units of output.

What are the three stages of production?

1. Increasing Marginal Returns, 2. Diminishing Marginal Returns, 3. Negative Marginal Returns.

What happens in Stage 1: Increasing Marginal Returns?

The marginal product of each additional worker increases, leading to rising total output.

What characterizes Stage 2: Diminishing Marginal Returns?

Production grows at smaller amounts; output increases but at a diminishing rate as more variable inputs are added.

What leads to diminishing returns in Stage 2?

Workers begin sharing tools/equipment, making coordination more difficult.

What occurs in Stage 3: Negative Marginal Returns?

The firm hires too many workers, leading to a fall in total output and potential firings.

Why do most companies avoid hiring workers at negative returns?

Because total output falls, and it is not profitable to operate in this stage.

How do companies determine the number of workers to hire?

The exact number depends on the revenue from the sale of the output, typically hiring between 6-10 workers.

What is the significance of understanding marginal product for business owners?

It helps them determine the optimal number of workers to maximize production and profits.

What is a production schedule?

It outlines the relationship between the number of workers hired and the total output produced.

What is the relationship between marginal product and total product?

The sum of marginal products equals total product.

What happens to total output when the marginal product is positive but diminishing?

Total output continues to increase, but at a decreasing rate.

What is the typical staffing strategy for retailers during busy seasons?

They staff up to meet increased demand, such as hiring more workers during the holidays.

What is the impact of hiring too many workers?

It can lead to negative marginal returns, causing total output to decrease.