economics chapter 3/4 review

market

the exchange of goods and services and the demand that exists for them.

demand

quantities of a good or service that buyers will purchase at various prices during a particular period of time

quantity demanded

single relationship between price and quantity (demand)

law of demand

quantity demanded and price move in opposite directions

supply

quantities that sellers are willing to offer at various prices in time

quantity supplied

relationship between price and quantity (supply)

law of supply

the quantity supplied of a good rises when the price of the good rises

market equilibrium

the price at which the quantity demanded equals the quantity supplied

shortages

when prices are below the equilibrium price. sellers not willing to sell as much as buyers are willing to purchase

surpluses

when prices are above the equilibrium price. buyers are not willing to purchase as much as sellers are willing to produce

determining surplus/ shortage calculation

quantity supplied - quantity demanded = surplus (+) or shortage (-)

changes in price

movement along the demand curve

non price factors

cause entire curve to shift

increase in demand

shifts demand curve right

decrease in demand

shifts demand curve left

non price factors affecting demand

income, population tastes and preferences, future price expectations, prices of substitute goods

income

increase in buyers income allows consumers to purchase more

population

increased population increases demand

tastes and preferences

individual tastes and preferences influences demand

future price expectations

eg. price increase in future, demand increases now

price of substitute goods

substitute good B price increases, demand for A increases

complementary goods

2 goods that are bought and used together, influences demand of each other

increased supply

shifts supply curve right

decreased supply

shifts supply curve left

non price factors affecting supply

cost, number of sellers, technology, nature and environment, prices of related outputs

cost

changes in production costs affects quantities that suppliers are willing to supply, directly affecting profits

number of sellers

less sellers decreases market supplies if remaining sellers do not increase production

technology

decreases production costs, increases supply

nature and environment

environmental factors affect supply

prices of related outputs

if product A is more profitable than product B, decreased supply of B, increased supply of A

perfectly competitive market

1. many sellers, none of which can dominate the market. 2. many buyers, no single one that can dictate price. 3. consistent quality, no price change based on quality. 4. all buyers and sellers know conditions in the market.

increase in demand

initially price stays same. causes shortage

increase in supply

initially price stays the same. causes surplus

decrease in demand

initially price stays the same. causes surplus

decrease in supply

initially price stays same. causes shortage

shortages

price increases until equilibrium is met

surpluses

price decreases until equilibrium is met

Adam Smith

self interest, invisible hand

self interest

when people act in their own self interest it manifests societal benefits at large

invisible hand

metaphor for individual pressures on market. natural fluctuation on price and flow of trade to find equilibrium

thomas robert malthus

population and food production

population and food production

humans well eventually be unable to produce enough food to sustain themselves. population-geometrically, food production-arithmetically

david ricardo

comparative advantage and free trade

comparative advantage

an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners

free trade

each country naturally devotes its capital and labour to such employments as are most beneficial to each

Karl Marx

communism and criticism of capitalism

communism

society has no class divisions or personal property

criticism of capitalism

believed that capitalism would fall due to revolutions from the lower classes

john maynard keynes

importance of government spending to stimulate economy

importance of government spending to stimulate economy

stimulate demand for common goods and bring more people back to the workforce

milton friedman

laissez-faire capitalism and the importance of the money supply

laissez-faire capitalism

minimum governmental interference in the economic affairs of individuals in society

money supply importance

government should keep money supply stable, expanding slightly each year to allow for natural economic growth