Chapter 3 - Supply and Demand

ECON:1100 Final Exam

What are the characteristics of a competitive market?

• many buyers and many sellers

• the goods offered are largely the same

• firms can freely enter or exit the market(in the long-run)

What are the five key elements of competitive markets?

• demand curve

• supply curve

• factors that shift the demand and supply curve

• market equilibrium

• changes in market equilibrium

What is demand?

it represents the behavior of the buyers

Demand schedule

it is the table of how much of a good consumers will want to buy at different prices

Demand curve

the line of the quantity demanded at different prices

Quantity demanded

the quantity users are willing to purchase at a particular price

What is the law of demand?

the higher the price for a good, people tend to demand less

What are the shifts that occur when there is a change in demand?

• rightward shift

• leftward shift

What does a rightward shift represent?

it means an increase in demand

What does a leftward shift represent?

it means a decrease in demand

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

a change in demand is a full shift of the demand curve, and a change in quantity demanded is a movement along the demand curve

What does it mean when there is a movement along the demand curve?

there was a change in price of a good, so the demand is still on the same curve but at a different point

What does it mean there is a complete shift of the demand curve?

these are non-price factors that shift the demand curve

What are five factors that shift the demand curve?

1. changes in prices of related goods

2. changes in income

3. changes in tastes

4. changes in expectations

5. changes in the number of consumers

What are two main factors that relate to changes in prices of related goods?

substitutes and complements

What are substitutes?

these are goods that are for the most part interchangeable, so the increase of price of one good will increase the demand of its substitute(and vice versa)

What are complements?

these are goods that are mainly bought together, and have the opposite relationship of substitutes, the increase of price of one of the goods will decrease the demand of the good

What are the factors that lie under changes in income?

normal and inferior goods

What is a normal good?

when income increases, so does the demand of the good

What is an inferior good?

when income increases, the demand of the good decreases

What does it mean by changes in expectations?

consumers buy in accordance with expectations, if they anticipate that a price will be later in the future demand will decrease for that good in the current situation

What does it mean by change in number of consumers?

as population of an economy changes, the numbers of buyers will also change

What is supply?

it represents the behavior of sellers

Supply schedule

shows how much of a good would be supplied at different prices

Supply curve

shows the quantity supplied at various prices

Quantity supplied

the quantity that producers are willing and able to sell at a price

What are the important supply shifters?

1. input prices

2. the price of related goods

3. technology

4. expectations

5. number of producers

Why are input prices important for shifting the supply curve?

increase in price of input makes the production more costly leading the SC to shift left, and a decrease in price of input makes the production less costly leading to SC to shift right

Why is the price of related goods important for shifting the SC?

a producer often produces a mix of goods (and same with demand shifts)

How does technology impact shifting of the SC?

new and better technology enables producers to reduce production costs

How do expectations impact shifting of the SC?

the expectation of a higher price of the good in the future allows producers to store current supply, decreasing the supply

What are the two factors that affect the number of producers?

entry and exit

What is entry(supply)?

it implies more producers, and increases supply

What is exit(supply)?

implies less producers, decreasing supply

What is equilibrium?

the amount consumers are willing to pay at the price producers are willing to sell —> Qs = Qd

Equilibrium price

the price at which there is equilibrium

Equilibrium quantity

the quantity at which there is equilibrium

What is surplus?

when there is too much of a good, the supply is greater than the demand and is above equilibrium level

Why do surpluses not last?

sellers will reduce price to get back to equilibrium

What is a shortage?

when there is a lack of a good, the demand is higher than the supply and it below the equilibrium level

Why do shortages not last?

sellers realize that they can charge more and sell more, going back to equilibrium