Chapter 4 flashcards
Questions:
What factors affect buyers/sellers
How does supply and demand determine the price of a good and the quantity sold
How do changes in factors that affect demand or supply affect the market price and quantity of a good
How do markets allocate resources
Fundamentals of markets:
Firms: supply goods or services
Consumers: purchase goods or services
Exchange happens through prices established in markets. Supply or demand factors can change the market price.
Market: a place where buyers and sellers interact
A group of buyers and sellers of a good or service.
Buyers as a group determine the demand for products.
Sellers as a group determine the supply.
Market Economy: resources are allocated among households and firms with little or no government interference.
Producers and consumers are motivated by self-interest.
The invisible hand of the market guides resources to their highest valued uses.
Competitive Markets: many buyers and many sellers.
The goods that each vendor sells are similar.
No single individual has influence over the price.
Imperfect Markets: the buyer or seller influences the price.
Market Power: the firm's ability to influence price.
Monopoly: A single company that supplies the entire market for a good or service.
Demand: the amount of a good that buyers are willing and able to purchase.
Law of demand:
Other things equal
When the price of a good rises, the quantity demanded for the good falls.
When the price falls, the quantity demanded rises.
Demand table: shows the relationship between the price of a good and the quantity demanded.
Market Demand: the sum of all individual demands for a good or service.
Demand curve: shows how price affects quantity demanded, other things being equal.
These other things are non-price determinants of demand.
Demand curve shifters:
Number of buyers.
An increase in the number of buyers increases the quantity demanded at each price.
Shifting the curve to the right.
Vice versa for a decrease in the number of buyers.
Income.
Normal good, other things are constant.
An increase in income leads to an increase in demand, shifting the D curve to the right.
An inferior good, other things being constant
An increase in income leads to a decrease in demand, shifting the D curve to the left.
Price of related goods.
Substitutes: 2 goods are substitutes if an increase in the price of one leads to an increase in the demand for the other.
Complements: 2 goods are complements if an increase in the price of one leads to a decrease in the demand for the other.
Tastes.
Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the right.
Expectations about the future.
Expect income to increase, increase in current demand.
Expect prices to increase, increase in current demand.
Shift vs. Movement Along Curve
Change in demand: moving to a different demand curve.
Occurs when a non-price determinant changes.
SHIFT
Change in quantity demand: moving along points within the same demand curve.
Occurs only when price changes.
MOVEMENT
Supply:
Amount of a good.
Sellers are willing and able to sell.
Law of Supply
Other things are equal
When the price of a good rises, the quantity of the supplied good rises.
When the price falls, the quantity of the supplied good falls.
Supply schedule: a table that shows the relationship between the price of a good and the quantity supplied.
Supply curve shifters:
Shows how price affects quantity supplied, other things being equal.
These other things are non-price determinants of supply.
Input prices
Supply is negatively related to the prices of inputs
A fall in input prices makes production more profitable at each output price.
Examples of input prices include wages, the prices of raw materials, and others.
Technology: determines how many inputs are required to produce a unit of output
Cost-saving technological improvement has the same effect as a fall in input prices, shifting the S curve to the right
Number of sellers: an increase in the number of sellers
Increases the quantity supplied at each price
Expectations about the future
Example: events in the Middle East lead to expectations of higher oil prices.
Owners of Texas oilfields reduce supply now, save some inventory to sell later at higher prices
Shifts the S curve left
Sellers may adjust supply when their expectations of future prices change (ONLY IF THE GOOD IS PERISHABLE).
Surplus: excess supply
The quantity supplied is greater than the quantity demanded.
Shortage: excess demand
The quantity demanded is greater than the quantity supplied.
3 steps to analyzing changes in equilibrium
Decide whether the event shifts the s curve, the d curve, or both
Decide whether the curve shifts to the right or left
Compare the new equilibrium with the old one.
If supply increases more than demand, the price falls
If demand increases more than supply, the price rises