Chapter 2: Interaction of Demand and Supply Flashcards
Define demand
Demand refers to the quantity that consumers are willing and able to buy at each and every price, in a specified time period, ceteris paribus
What is the law of demand?
The law of demand states that the quantity demanded of a good is inversely related to its price, ceteris paribus
What are the non-price factors that affect demand?
E - expectation of future prices
G - government regulations/ policies
Y - income level of consumers
P - price of related goods (complements/ substitutes)
T - taste and preferences of consumers
Define supply
Supply refers to the quantity of a good that producers are willing and able to produce at each and every price, in a specified time period, ceteris paribus.
What is the law of supply?
The law of supply states that the quantity supplied of a good is positively related to its price, ceteris paribus.
What is the market equilibrium?
The equilibrium price is defined as the price level at which the quantity demanded by consumers is equal to the quantity supplied by producers
How is a surplus eliminated?
(Surplus occurs when quantity supplied exceeds the quantity demanded) there is a downward pressure on price which causes consumers to increase the quantity demanded and producers will reduce their quantity supplied. Price continues to fall until qty dded=qty ssed and thus mkt eqm is achieved at Pe and Qe
How is a shortage eliminated?
(Shortage occurs when quantity demanded exceeds quantity supplied) there is an upward pressure on price which causes consumers to decrease the quantity demanded and producers will increase quantity supplied . Price continues to increase till mkt eqm is achieved at Pe and Qe
How do indirect taxes on goods work?
A tax imposed on a good will increase the COP and thereby reduce the supply of the good.
A specific tax is a type of tax in which a fixed amount of tax is imposed on every unit of the good sold
An ad valorem tax is a tax imposed as a fixed percentage of the price of the good
How do quotas work?
Quotas are limits imposed on the quantity of a good that can be provided during a given period of time (limits supply)
How do subsidies for producers work?
It lowers the COP, making producers more willing and able to produce and sell more at the same price
What happens when there are changes in both demand and supply?
The outcome can be indeterminate for either equilibrium price or quantity
