Demand & Supply

These flashcards cover key concepts related to demand and supply, market equilibrium, elasticity, and other fundamental economic principles.

What does the demand schedule illustrate in an economy?

It shows how many units of a good or service will be bought at different prices.

What is the law of demand?

When the price of a good increases, the quantity demanded decreases, and vice versa.

What are complementary goods?

Goods that are consumed together, such as wine and Gouda cheese.

What is the relationship between a good's price and the quantity supplied according to the law of supply?

If the price of a good increases, the quantity supplied increases, and vice versa.

What is the market equilibrium price?

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

How does income elasticity of demand differ between normal and inferior goods?

Normal goods have positive elasticity (demand increases with income), while inferior goods have negative elasticity (demand decreases with income).

What effect does an increase in the number of buyers have on the market demand curve?

It shifts the market demand curve to the north-east.

What is the price elasticity of demand?

A measure of the responsiveness of the quantity demanded of a good to a change in its price.

How does a price ceiling affect the market?

It can create a shortage if set below the equilibrium price.

What happens when the price of a complement good increases?

The demand for the related good decreases, resulting in a south-west shift of the demand curve.

What does a binding price floor create in the market?

A surplus, as the quantity supplied exceeds the quantity demanded.

What is the effect of a $20 tax on buyers in the wine market?

The demand curve shifts south-west, leading to higher prices and lower quantities sold.

What is expected to happen to the supply curve if the price of production inputs increases?

The supply curve shifts to the north-west (to the left), indicating a decrease in supply.

What does the term 'ceteris paribus' mean in economic analysis?

It means 'all else being equal', holding other factors constant when analyzing the relationship between two variables.

What formula is typically used to calculate the price elasticity of supply?

It is calculated by dividing the percentage change in quantity supplied by the percentage change in price.

What is indicated by a price elasticity of demand coefficient with an absolute value less than one?

It indicates inelastic demand; consumers are less responsive to price changes.

What is the formula for Sarah’s demand function expressed in general terms?

Q = f(P_wine; P_complement, P_substitute, I, T & P, E) where Q is quantity demanded.

What happens to the quantity demanded of a normal good when a consumer's income increases?

It generally increases, as the good is favorable to the consumer.