Chapter 3: Demand and Supply

Flashcards based on Demand and Supply Lecture Notes

What does the law of demand state?

Other things remaining the same, the higher the price of a good, the smaller is the quantity demanded; and the lower the price of a good, the larger is the quantity demanded.

What type of relationship exists between price and quantity demanded, according to the law of demand?

Inverse relationship

What does a demand curve show graphically?

The relationship between the quantity demanded of a good and its price when all other influences on consumers’ planned purchases remain the same.

What is a demand schedule?

The tabulated pairs of price and quantity demanded of a good.

What does a change in quantity demanded refer to?

A consumption change due to a change in the price of the good - a movement along the demand curve.

What does willingness to pay measure?

Marginal benefit

What happens to the demand curve when demand increases?

The demand curve shifts rightward.

What happens to the demand curve when demand decreases?

The demand curve shifts leftward.

What is the distinction between a change in quantity demanded and a change in demand?

A change in quantity demanded is a movement along the demand curve due to a price change, while a change in demand is a shift of the entire demand curve due to other influences.

Name six main factors that can cause a change in demand (shift the demand curve).

The prices of related goods, expected future prices, income, expected future income and credit, population and preferences.

What is a substitute good?

A good that can be used in place of another good.

What is a complement good?

A good that is used in conjunction with another good.

What happens to current demand if the price of a good is expected to rise in the future?

Current demand for the good increases and the demand curve shifts rightward.

What is a normal good?

A good for which demand increases as income increases and the demand curve shifts rightward.

What is an inferior good?

A good for which demand decreases as income increases and the demand curve shifts leftward.

What does the law of supply state?

Other things remaining the same, the higher the price of a good, the greater is the quantity supplied; and the lower the price of a good, the smaller is the quantity supplied.

What type of relationship exists between price and quantity supplied, according to the law of supply?

Direct relationship

What does the law of supply result from?

The general tendency for the marginal cost of producing a good or service to increase as the quantity produced increases.

What does the supply curve show graphically?

The relationship between the quantity supplied of a good and its price when all other influences on producers’ planned sales remain the same.

What is a supply schedule?

The tabulated pairs of price and quantity supplied of a good.

What does a change in quantity supplied refer to?

A production change in response to a price change – a movement along the supply curve.

What is a supply curve also?

A minimum-supply-price curve.

What happens to the supply curve when supply increases?

The supply curve shifts rightward.

What happens to the supply curve when supply decreases?

The supply curve shifts leftward.

Name six main factors that can cause a change in supply of a good (shift the supply curve).

The prices of factors (inputs) of production, the prices of related goods produced, expected future prices, the number of suppliers, technology and state of nature.

How does a rise in the price of a factor of production affect supply?

A rise in the price of a factor of production decreases supply and shifts the supply curve leftward.

What is a substitute in production?

Another good that can be produced using the same resources.

What are complements in production?

Goods that must be produced together.

What happens to the supply of a good today if its price is expected to rise in the future?

Supply of the good today decreases and the supply curve shifts leftward.

How do advances in technology affect supply?

Advances in technology increase supply and shift the supply curve rightward.

How does a natural disaster affect supply?

A natural disaster decreases supply and shifts the supply curve leftward.

What is equilibrium in a market?

A situation in which the price balances the plans of buyers and sellers.

What is the equilibrium price?

The price at which the quantity demanded equals the quantity supplied.

What is the equilibrium quantity?

The quantity bought and sold at the equilibrium price.

What happens at prices above the equilibrium price?

A surplus forces the price down.

What happens at prices below the equilibrium price?

A shortage forces the price up.

What happens when there is an increase in demand?

At the original price, there is now a shortage, The price rises, and the quantity supplied increases along the supply curve.

What happens when there is a decrease in demand?

At the original price, there is now a surplus. The price falls, and the quantity supplied decreases along the supply curve.

What happens when there is an increase in supply?

At the original price, there is now a surplus. The price falls, and the quantity demanded increases along the demand curve.

What happens when there is a decrease in supply?

At the original price, there is now a shortage. The price rises, and the quantity demanded decreases along the demand curve.

If both D & S increase, what must happen to market equilibrium quantity?

increase equilibrium quantity. the change in equilibrium is uncertain because the increase in demand raises the price and the increase in supply lowers it.

If both D & S decrease, what must happen to market equilibrium quantity?

decreases the equilibrium quantity; the change in equilibrium price is uncertain since decreased demand lowers the price while decreased supply raises it.

If D ↓ & S ↑, what must happen to market equilibrium price?

lowers the equilibrium price; the change is uncertain because the decrease in demand decreases the quantity and the increase in supply increases it.

If D ↑ & S ↓, what must happen to market equilibrium price?

raises the equilibrium quantity; the change in equilibrium is uncertain because the increase in demand increases the quantity and the decrease in supply decreases it.

How is market demand derived?

Market demand is derived by summing up quantities demanded by all consumers at each price.

How is a market demand curve derived?

A market demand curve can be derived by summing horizontally the individual demand curves.

How is market supply derived?

Market supply is derived by summing up quantities supplied by all suppliers at each price.

How is a market supply curve derived?

A market supply curve can be derived by summing horizontally the individual supply curves.