econ chapter 2 review

demand

the relationship between a products price and quantity demanded

supply

the relationship between a products price and quantity supplied

law of demand

price and quantity demanded are inversely related. quantity demanded varies inversely with the price (higher price = fewer purchases, lower price = more purchases)

law of supply

a direct relationship between price and quantity supplied (price increases = quantity supplied increases, price decreases = quantity supplied decreases)

demand curve

the curve runs downward (top left to bottom right)

supply curve

curve runs upward (bottom left to top right)

demand factors

1. income 2. number of buyers/change in population 3. price of substitute goods/other products 4. consumer expectations 5. consumer preferences (trends)

income factor

normal products, an increase causes a shift to the right. Inferior products (no name products), an increase in cases of a shift to the left

number of buyers/changes in population factor

increase causes a shift right, decrease causes a shift left

price of substitute goods/other products factor

for substitute goods, a rise in the other products causes a rightward demand shift. Example: Heinz vs. French’s ketchup · For complimentary goods, a rise in the other products' price causes a leftward demand shift. Example: ketchup and mustard

consumer expectations factor

if consumers are expecting a rise in the price of a good/service in the future, they may choose to purchase it immediately, increasing demand

consumer preferences/change in taste factor

can increase or decrease the demand for a good or service. Example: fashion trends

supply factors

1. number of producers 2. resource prices 3. state of technology 4. prices of related products 5. changes in nature 6. producer expectations

number of producers factor

an increase causes a rightward supply shift ex. electric cars

resource prices factor

an increase causes a leftward supply shift ex. lithium for electric cars

state of technology factor

an improvement causes a rightward supply shift ex. ford plant or more tehnology

prices of related products factor

an increase causes a leftward supply shift ex. increase in electric cars means a decrease in other cars

changes in nature factor

an improvement causes a rightward supply shift ex. avocado supply in Mexico, droughts and bad rains lead to decreased supply

producer expectations factor

Expecting lower prices in the future causes an immediate rightward supply shift. Example: housing market, builders will build more now if they believe prices will decrease in the future

movement along the curve

price related factors (changes in quantity supplied)

shifts on the curve

non-price related factors (change in supply)

rightward demand shift

pushes up both equilibrium price and quantity

leftward demand shift

pushes down both equilibrium price and quantity

rightward supply shift

pushes equilibrium price down and equilibrium quantity up

leftward supply shift

pushes equilibrium price up and equilibrium quantity down

simultaneous rightward shift

raise equilibrium quantity but the price depends on the shift

If demand shifts rightward more than supply, then price raises

If demand shifts leftward more than supply, then the price falls

Simultaneous shift in demand and a leftward shift

supply raises equilibrium price but quantity depends on the shift

If supply shifts leftward more than demand shifts rightward, then quantity falls

If demand shifts rightward more than supply shifts leftward, then quantity rises

surplus

excess supply, so price is pushed down

shortage

excess demand, so price is pushed up

total utility

overall satisfaction that a consumer derives from the consumption of particular goods and services. the sum of the marginal utilities of all such individual items

marginal utility

a measure of the extra satisfaction that a consumer achieves from consuming one more unit of product

law of diminishing marginal utility

As total utility (consumption) increases, the marginal utility derived from each additional unit decreases