C5 Study Guide Flashcards
(39 cards)
What is demand?
Demand is how much of a good or service consumers are willing and able to buy at different prices.
Example: If ice cream prices fall, more people will buy ice cream. Demand measures that relationship.
Why is the demand curve typically downward sloping?
The demand curve slopes downward because as price decreases, consumers want to buy more of the product, and as price increases, they buy less.
Example: If coffee prices drop from $5 to $3, more people will buy coffee, so quantity demanded goes up.
What are the factors that shift the demand curve?
- Income
- Price of related goods (substitutes and complements)
- Consumer tastes
- Expectations
- Number of buyers
Examples: If Pepsi price rises, demand for Coke goes up; if peanut butter price rises, demand for jelly goes down.
What is the supply curve?
The supply curve shows how much producers are willing to sell at different prices.
It usually slopes upward because higher prices motivate suppliers to produce and sell more.
What are the factors that shift the supply curve?
- Input costs
- Technology
- Expectations
- Number of sellers
Example: Higher cost of steel makes car production expensive, reducing car supply.
If the price of cereal decreases, what happens to the demand for milk?
Demand for milk increases since cereal and milk are complements.
This usually leads to higher milk prices and quantity sold.
If demand and supply both increase, how do the equilibrium price (P) and quantity (Q) change?
Equilibrium quantity always increases; equilibrium price could increase, decrease, or stay the same depending on which increases more.
Example: More people want smartphones (demand rises), and more companies start making smartphones (supply rises).
What is the price elasticity of demand?
Price elasticity measures how sensitive consumers are to price changes.
It’s calculated as a percentage change in quantity demanded divided by percentage change in price.
What does it mean if a good is elastic?
Consumers buy significantly less if price goes up and significantly more if price goes down.
Example: Luxury items (e.g., designer bags).
What does it mean if a good is inelastic?
Consumers’ buying habits don’t change much even if the price changes.
Example: Medicine or gasoline.
What is income elasticity of demand?
Income elasticity measures how changes in income affect demand for a product.
What do the values of income elasticity tell us about whether a good is a normal good or an inferior good?
- Normal goods: Income rises → demand rises (positive income elasticity)
- Inferior goods: Income rises → demand falls (negative income elasticity)
Examples: Restaurant meals (normal good); cheap instant noodles (inferior good).
What is cross-price elasticity of demand?
Cross-price elasticity of demand measures how a price change in one good affects demand for another good.
What do the values of cross-price elasticity tell us about whether two goods are substitutes or complements?
- Substitutes: Positive cross-price elasticity
- Complements: Negative cross-price elasticity
Examples: Pepsi and Coke (substitutes); burger and fries (complements).
Define consumer surplus in your own words.
Consumer surplus is the difference between what consumers are willing to pay and what they actually pay.
Which area(s) represent consumer surplus on a graph?
Consumer surplus is the area above the price line and below the demand curve.
Reasoning: Consumers were willing to pay higher prices but pay the lower equilibrium price.
Define producer surplus in your own words.
Producer surplus is the difference between the price producers receive for selling a product and the minimum price they’d be willing to accept.
Which area(s) represent producer surplus on a graph?
Producer surplus is the area below the price line and above the supply curve.
Reasoning: Producers receive price P1, which is higher than the minimum they’d accept along the supply curve.
What is total surplus?
Total surplus = consumer surplus + producer surplus.
What can total surplus tell us about market efficiency?
If the total surplus is maximized, the market is considered efficient.
Define gross domestic product (GDP).
GDP measures the total market value of all final goods and services produced within a country’s borders in a specific time.
Describe the four components of GDP.
- Consumption (C): Spending by households
- Investment (I): Spending by businesses
- Government spending (G): Purchases made by the government
- Net exports (NX): Exports minus imports
Examples: Buying groceries (C); company buying machinery (I); building roads (G); selling American cars abroad (NX).
Explain why national income must be equal to national expenditure.
Every dollar spent by buyers is a dollar of income earned by sellers.
Would a new house built in 2024 be included in calculating GDP?
Yes (investment).
