Untitled Flashcards Set

Market

Any place that allows buyers and sellers to interact and exchange goods and services  

• Answers the three key economic questions

  • What; How; For whom

Increase in quantity demanded: Why?  

The income effect

• At higher price levels; real income/purchasing power decreases for some consumers 

The substitution effect 

• Humans are always making comparisons

• Therefore when prices increase, their substitutes will become relatively cheaper and more attractive

Diminishing marginal utility 

Questions 

Utility: Satisfaction that consumers gain from consumption

Marginal: Change; response to changes in another variable

Definition: Additional benefit that is derived from the last item that is consumed is assumed to be lower than the one before it

• Each successive unit of the good consumed provides the consumer with less benefit (utility)

Relationship between DMU and the slope of the demand curve?

1. The more you spend, the less satisfied you are 

2. Sellers have to lower prices to boost economic activity

3. Buyers only willing to pay a price equal or less than the perceived value is 

What happens to the position of the demand curve when the price increases?

There is contraction in demand therefore movement in the demand curve 

• Does not shift when its own price changes 

Disposable Income 

(Direct and indirect contribution to the production process 

+ government transfers) -  (Direct income taxes)

Discretionary Income 

Discretionary income - necessary expense

Price of substitutes 

Price of complements 

Consumer preferences and tastes

Population change 

Consumer sentiment 

Costs of production 

Competitive supply

Joint supply 

Technology 

Climate 

Government intervention

Number of Firms 

Price expectations 

Price of the quantity demanded is equal to the quantity supplied

• Efficient outcome had been achieved

• Determined by the interaction of demand + supply: consumer and producer sovereignty

  • Consumer sovereignty is when consumers have ultimate power 

How would the market return to equilibrium if the product was overpriced?

1. Producers start offering discounts 

2. Price decreases: demand expands because more affordable 

3. Price decreases: supply contracts because less profitable

How would the market return to equilibrium if the product was underpriced?

1. Buyers bid up the price by competing with each other 

2. Price increases: demand contracts because less affordable

3. Price increases: supply expands because more profitable (more firms interested in supplying the good 

Disequilibrium

Price is above or below the market clearing level

Market clearing level: supply equals demand and there is no surplus or shortage