Market Equilibrium, Supply Functions, and Market Exchange

Flashcards covering market equilibrium shifts, mathematical supply functions, excess supply/demand, surplus, and supply determinants based on the lecture notes.

What causes a movement along a supply or demand curve versus a shift of the curve?

A change in the product price causes a movement along the curve (a change in quantity supplied or demanded), whereas changes in determinants other than price cause the entire curve to shift (a change in supply or demand).

What are the effects on equilibrium price ($P$) and equilibrium quantity ($Q$) when demand increases?

Equilibrium price increases ($P\uparrow$) and equilibrium quantity increases ($Q\uparrow$).

What are the effects on equilibrium price ($P$) and equilibrium quantity ($Q$) when demand decreases?

Equilibrium price decreases ($P\downarrow$) and equilibrium quantity decreases ($Q\downarrow$).

What are the effects on equilibrium price ($P$) and equilibrium quantity ($Q$) when supply increases?

Equilibrium price decreases ($P\downarrow$) and equilibrium quantity increases ($Q\uparrow$).

What are the effects on equilibrium price ($P$) and equilibrium quantity ($Q$) when supply decreases?

Equilibrium price increases ($P\uparrow$) and equilibrium quantity decreases ($Q\downarrow$).

What is the net effect on equilibrium price ($P$) and quantity ($Q$) when both demand increases ($D\uparrow$) and supply increases ($S\uparrow$)?

Equilibrium quantity increases ($Q\uparrow$), but the net effect on equilibrium price ($P$) is ambiguous because demand pushing price up and supply pushing price down depend on their relative sizes.

What is the net effect on equilibrium price ($P$) and quantity ($Q$) when demand decreases ($D\downarrow$) and supply increases ($S\uparrow$)?

Equilibrium price decreases ($P\downarrow$), but the net effect on equilibrium quantity ($Q$) is ambiguous.

What is the net effect on equilibrium price ($P$) and quantity ($Q$) when demand increases ($D\uparrow$) and supply decreases ($S\downarrow$)?

Equilibrium price increases ($P\uparrow$), but the net effect on equilibrium quantity ($Q$) is ambiguous.

What is the net effect on equilibrium price ($P$) and quantity ($Q$) when both demand decreases ($D\downarrow$) and supply decreases ($S\downarrow$)?

Equilibrium quantity decreases ($Q\downarrow$), but the net effect on equilibrium price ($P$) is ambiguous.

How is market equilibrium defined mathematically and graphically?

It is the price at which the amounts supplied and demanded are equal ($Q_d = Q_s$), represented graphically as the intersection point of the supply and demand curves.

Given $Q_D = 15 - 2P_{\text{Pizza}}$ and $Q_S = 5P - 6$, what are the equilibrium price ($P_{\text{equ}}$) and quantity ($Q_{\text{Pizza}}$)?

Equilibrium price $P_{\text{equ}} = 3$ and equilibrium quantity $Q_{\text{Pizza}} = 9$.

What occurs during a market state of excess supply, and how does the market adjust?

Sellers are rationed as they cannot sell all units despite being willing to, leading sellers to lower their prices, which decreases $Q_s$ and increases $Q_d$ until excess supply disappears.

What occurs during a market state of excess demand, and how does the market adjust?

There are not enough units at that price, leading buyers to increase their bids, which increases $Q_s$ and decreases $Q_d$ until excess demand disappears.

How are Willingness to Sell (WTS) and Willingness to Pay (WTP) defined?

WTS is the minimum price firms are willing to sell at (y-intercept on the supply graph), and WTP is the maximum price consumers are willing to pay for a good.

If Bruno has a WTP of $8\text{€}$ for a meal and Carmen has a WTS of $5\text{€}$, what surplus is generated if they trade at $6.50\text{€}$?

Bruno obtains a surplus of $1.50\text{€}$, Carmen obtains a surplus of $1.50\text{€}$, and total surplus is $3\text{€}$.

When does deadweight loss occur in a market exchange?

Deadweight loss occurs when willingness to pay (WTP) for a unit is lower than willingness to sell (WTS) or when a trade fails to happen, representing a potential benefit the market failed to realize.

In the supply function $Q_{s\,\text{pizza}} = 9 + 5P_{\text{Pizza}} - 2P_{\text{Tomato}} - 1.25P_{\text{Bread}}$, how do input and substitute prices affect pizza supply?

Increases in the price of tomato sauce (input) and bread (substitute of production) decrease the amount of pizza sellers supply, while increases in the price of pizza increase the amount supplied.

For a linear supply function $Q_s = bP - a$ (where $b > 0$), what are the inverse supply function formula and its y-intercept?

The inverse supply function is $P = \frac{a}{b} + \frac{1}{b}Q_s$, and its y-intercept is $\frac{a}{b}$.

What are the primary determinants of market supply?

Price of the good, technology of the firm, price of inputs (e.g., labour), substitute goods of production, government taxes and regulations, number of firms, and other determinants such as expectations.

Why is the product supply curve upward sloping?

Selling the product is less attractive when the price is low than when it is high.

Where does an individual product supply curve originate from?

It comes from cost minimisation and profit maximisation.