Economics Test 2

competitive market

where there are many buyers and sellers of the same good or service, none of whom can influence the price at which the good or service is sold

because no individuals actions have a noticeable effect on the price at which the good or service is sold. 

competitive market’s importance in supply and demand

1. The demand curve
2. The supply curve
3. The set of factors that cause the demand/supply curve to shift (AKA determinants of demand/supply)
4. The market equilibrium, which includes the equilibrium price and quantity
5. The way a market equilibrium changes when the supply or demand curve shifts.

5 key elements of a supply and demand model

Demand

the amount of a good or service that a consumer is willing and able to buy at *various* possible prices during a given time period.

1. the consumer must be willing and able to buy the product or service


2. the demand for the product must be examined for a specific time period

2 conditions that must be met for demand

quantity demanded

the amount of a good or service that a consumer is willing and able to buy at each *particular* price during a given time.

there is an inverse relationship between price and the quantity demanded.

law of demand

Income Effect, the Substitution Effect, and Diminishing Marginal Utility

3 concepts explaining law of demand

Income Effect

how people's purchasing power (their availability to spend on goods and services) influences the quantity demanded.

Substitution Effect

explains the tendency of consumers to substitute a similar, lower-priced product for another product that is relatively more expensive. (Does not always apply).

Diminished Marginal Utility

how as more products are consumed, the satisfaction received decreases with each unit. “The marginal utility of each unit consumed diminishes.” This explains how the demand for a product isn’t infinite.

Demand Schedule

a list of the quantity of goods that consumers are willing and able to buy at a series of possible prices.

Demand Curve

plots the information of a demand schedule on a graph, each plot representing a specific combination of price and quantity demanded.

Shift of the demand curve is caused by a determinant of demand, while movement along the demand curve is due to price changes.

Shift vs movement on demand curve

1. Consumer tastes and preferences
2. Market size
3. Income
4. Prices of related goods
5. Consumer expectations

the 5 determinants of demand

Elasticity of demand

the degree to which changes in a goods price affect the QD by consumers.

 It is important because people need to know how much the demand will change when the price changes so they can prepare for it. 

importance of elasticity of demand

Elastic demand is when a small change in a good’s price causes a major opposite change in the QD (a small decrease in a good’s price causes a significant increase in the QD). Inelastic demand exists when a change in a goods price has little effect on the QD.

Elastic vs Inelastic demand

E=((Q1-Q0)/(Q1+Q0)/2) x 100/ ((P1-P0)/(P1+P0)/2) x 100

The equation determining elastic vs inelastic demand is…

Multiply price by quantity demanded at original price and new price.

How to do Total Revenue Test

This will tell us if something is elastic or inelastic. When price is up but revenue is down, it is elastic. When price is up and revenue is up it is inelastic.

What the total revenue test tells us

Supply

 the quantity of goods and services that producers are willing and able to offer at various possible prices during a given time period.

Quantity Supply

the amount of a good or service that a producer is willing to sell at each particular price.

producers supply more goods and services when they can sell them at higher prices and fewer goods and services when they must sell them at lower prices.

Law of Supply states

Profit motive

businesses want to make as much money as they can

because it governs how individual companies make decisions as well as helps direct the use of resources in the entire market. It is also the reason for the law of supply. 

importance of profit motive

Supply schedule

shows the relationship between the price of a good or service and the quantity that producers will supply in a chart.

Supply Curve

plot on a graph the information from a supply schedule. Each point plotted represents a specific combination of price and quantity supplied. 

A shift in the supply curve is caused by a determinant of supply such as price, while movement along the supply curve is due to quantity supplied.

shift vs movement on supply curve

1. Prices of resources
2. Government tools
3. Technology
4. Competition
5. Prices of related goods
6. Producers expectations

6 determinants of supply

Prices allow producers and consumers to communicate with each other.

Importance of prices

Equilibrium

 the point at which the QS and QD for a product equal the same price.

It is important because it makes sure that no individual seller could make themselves better off by offering to sell either more or less of a good and it makes sure the price is at a level that exactly matches the QD by consumers and the QS by producers.

Importance of equilibrium

You find equilibrium by putting both a supply and demand curve on the same graph and finding where they intersect.

How to find equilibrium

surplus

when the market price is higher than the equilibrium price.

 Producers will lower the price of the product if possible to fix the issue.

How producers resolve a a surplus

shortage

when the quantity demanded exceeds the quantity supplied at the price offered.

Producers will increase the item's price to eliminate the issue. 

how producers resolve a shortage

A price ceiling is an established maximum price by the government while a price floor is an established minimum price by the government.

Price ceiling vs price floor

Elasticity of Supply

the degree to which price changes affect the quantity supplied.

it allows businesses to determine the price sensitivity of supply for certain goods and services.

Importance of elasticity of supply

Elastic supply exists when a small change in price causes a major change in the QS while inelastic supply exists when a change in a good’s price has little impact on the QS.

elastic vs inelastic supply

greater than 1 it is price elastic

equal to one it is unit elastic

less than 1 it is price inelastic

equal to one it is perfectly inelastic

What it means if the equation is greater than 1, equal to 1, less than 1, and zero

If there is an increase in demand, the price will also increase. If the demand drops, so will the price.

What happens to prices when there is a change in **demand**?

If there is a shortage in supply, the price will increase. If there is an increase in supply, the price will drop.

What happens to prices when there is a change in **supply**?