Microeconomics: Supply, Demand, Market Equilibrium, and Economic Models

Flashcards based on lecture notes covering supply, demand, equilibrium, trade-offs, opportunity cost, and economic models.

Supply

The ability and willingness of a firm to produce (sell) a product.

Quantity supply ($Q_s$)

The amount of a product a business sells or produces at a specific price.

Law of supply

The economic principle stating that as price ($P$) increases, quantity supply ($Q_s$) increases, and as price ($P$) decreases, quantity supply ($Q_s$) decreases.

Factors that Shift Supply

Non-price determinants that shift the supply curve, including cost of inputs, technology, prices of substitutes in production, and number of firms in the market.

Factor that moves Quantity Supply ($Q_s$)

The price of the product, which moves quantity supply along the existing supply curve rather than shifting the curve.

Price Change of the Product (Demand)

A change in the price of the product that causes movement along the demand curve, causing quantity demanded ($Q_d$) to move higher or lower.

Factors that Shift Demand

Non-price determinants that shift the entire demand curve left or right, including income, prices of related goods, population & demographics, expectation of future prices, and tastes & preferences.

Law of Demand

The economic principle that explains the negative slope of the demand curve as price changes the quantity of consumption of a good.

Normal Good

A good for which an increase in income leads to an increase in demand.

Inferior Good

A good for which an increase in income leads to a decrease in demand.

Complementary Goods

Related goods where an increase in the price of one good leads to a decrease in quantity demanded for that good and a decrease in demand for the complementary good.

Substitute Goods

Related goods where an increase in the price of one good leads to an increase in quantity demanded for that good and an increase in demand for the substitute good.

Trade-off

What one gives up in order to produce an activity.

Opportunity Cost

The highest-valued alternative one gives up in order to pursue an activity.

Three Questions Regarding Markets and Economies

The core economic questions of who decides what goods/services are made, how they are made, and who receives them (decided by buyers and sellers in market economies, or by a supreme leader as in North Korea).

Economic Models

A simplified version of reality that is used to answer certain questions.

Scientific Method in Economics

A 5-step process used by economists: 1) Decide on what assumptions to use, 2) Form a testable hypothesis, 3) Use economic data to test hypothesis, 4) Revise the model if data fails to explain the hypothesis, and 5) Retain the model to answer future questions.

Market Equilibrium

The point where quantity supplied equals quantity demanded ($Q_s = Q_d$) at the intersection of supply and demand, where consumers can buy as much as they want and producers can sell as much as they want.

Market Participation at Equilibrium

The market principle where buyers and sellers to the left of equilibrium quantity ($Q_E$) participate in the market, and nobody to the right of $Q_E$ participates.