Supply and Demand: Theory

Flashcards on core supply and demand principles, consumer and producer surplus calculations, and demand curve shifts.

What is the Law of Diminishing Marginal Utility as defined in the lecture?

It states that over a given period, the marginal (or additional) utility or satisfaction gained by consuming equal successive units of a good will decline as the amount consumed increases.

What factor causes a change in quantity demanded resulting in a movement along a demand curve?

A change in a good's own price.

How are Consumers' Surplus ($CS$) and Producers' Surplus ($PS$) defined mathematically?

$\text{Consumers' Surplus} = \text{Maximum buying price} - \text{Price paid}$ and $\text{Producers' Surplus} = \text{Price received} - \text{Minimum selling price}$.

If the price paid and received for a good is $\$4$, the maximum buying price is $\$20$, and the minimum selling price is $\$2$, what are the values of consumers' surplus and producers' surplus?

Consumers' surplus is $\$16$ ($\$20 - \$4$) and producers' surplus is $\$2$ ($\$4 - \$2$).