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EKN > Chapter 5 > Flashcards

Chapter 5 Flashcards

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1
Q

Demand defintion

A

Demand is the various amounts of a product that consumers are willing to purchase at each of a series of possible prices during a specified period of time.

the quantities that will be purchased at various possible prices

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2
Q

The law of demand

A

There is an inverse relationship between price and quantity demanded (other things equal)

as price falls, quantity demanded rises

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3
Q

Why the inverse relationship between price and quantity demanded?

A
  • People buy more of a product at a low price than a high price
  • Diminishing marginal utility
  • The income effect
  • The substitution effect
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4
Q

Giffen Goods

A

Contradictory to the law of demand: when the price increases, demand increases

bought by impoverished families

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5
Q

Demand schedule

A

Demand shown in table form reveals the relationship between various prices of the product and the quantity of the product a particular consumer would be willing and able to purchase at each of these prices

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6
Q

Market demand

A

To get from individual demand to market demand:
The sum of the quantities demanded by all individual consumers at each of the various possible prices

The higher the number of consumers, the higher the market demand of a specific product

Competition requires that more than one buyer be presented

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7
Q

The determinants of demand

also referred to as demand shifters

A
  1. Consumers’ tastes (preferences)
  2. Number of buyers
  3. Consumers’ incomes
  4. Price of related goods
  5. Consumer expectations

Assumed to be constant when single demand curve is drawn

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8
Q

Change in quantity demanded

(graphically)

A

A change in price causes movement along the demand curve

Price of a product is the most important determinant

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9
Q

Change in demand

(graphically)

A

A change in one or more of the determinents of demand causes a shift in the demand curve
* An increase in demand - demand curve shifts right
* A decrease in demand - demand curve shifts left

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10
Q

Determinants of demand: Income

Normal goods

also referred to as superior goods

A

Products whose demand varies directly with money income

e.g. most products

Rise in income = rise in demand (and vice versa)

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11
Q

Determinants of demand: Income

Inferior goods

A

Products whose demand varies inversely with money income

e.g. used clothing, second-hand cars, no-name brands

Rise in income = decrease in demand (and vice versa)

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12
Q

Determinants of demand: Prices of related goods

Subsitute good

A

Product that can be used in place of another one

e.g. Coke and Pepsi

An increase in the price of one good = Increase in demand for the other

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13
Q

Determinants of demand: Prices of related goods

Complementary good

A

Product that is used together with another product

e.g. toothbrushes and toothpaste

When the price of one good falls (its quantity demanded increases) - the demand for the other good increases (and vice versa)

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14
Q

Determinants of demand: Prices of related goods

Unrelated good

also referred to as independent goods

A

A price change in one has little or no effect on the demand for the other

e.g. shirts and guacamole

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15
Q

Determinants of demand:

Consumer expectations

A

An expectation of higher future prices = increase in demand (to beat the anticipated price rises) and vice versa

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16
Q

Supply definiton

A

The various amounts of a product that producers are willing to make available for sale at each of a series of possible prices during a specified time period.

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17
Q

The Law of Supply

A

There is a direct relationship between price and quantity supplied (other things equal)

As price rises; quantity supplied increases (and vice versa)

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18
Q

Supply Curve

A

Slopes upwards; reflects the law of supply

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19
Q

Market Supply

A

To get from individual supply to market supply:
The sum of the quantities supplied by all individual producers at each of the various possible prices

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20
Q

Determinants of supply

Also reffered to as supply shifters

A
  1. Resource prices
  2. Technology
  3. Taxes and subsidies
  4. Prices of other goods
  5. Producer expectations
  6. Number of sellers

Assumed to be constant when single supply curve is drawn

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21
Q

Change in supply

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A

A change in one or more of the determinents of supply result in a shift in the supply curve
* An increase in supply - supply curve shifts right
* A decrease in supply - supply curve shifts left

22
Q

Change in quantity supplied

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A

A change in price causes movement along the supply curve

Price of a product is the most important determinant

23
Q

Determinents of supply:

Resource prices

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A

An increase in resource prices causes a decrease in supply (and vice versa)

lower costs = increase in supply

24
Q

Determinents of supply:

Technology

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A

Improvements in technology enable firms to produce units of output with fewer resources = lower costs; causes an increase in supply

lower costs = increase in supply

includes techniques of production

25
# Determinents of supply: Taxes and Subsidies
Taxes (treated as costs): increase in taxes causes a decrease in supply Subsidies (support from the government): increase in subsidies causes an increase in supply | (and vice versa)
26
# Determinents of supply: Prices of other goods
Higher prices of other goods may entice substitution in production; decrease in supply of original good | Firms can use their plant and equipment to produce alternative goods
27
# Determinents of supply: Producer expectations
Changes in expectations about the future price of a product may affect the producers’ current willingness to supply the product | can increase or decrease supply; difficult to generalize
28
Equilibrium Price
The price where the intentions of buyers and sellers match ## Footnote Graphically, the equilibrium price and quantity is indicated by the intersection of the supply curve and the demand curve
29
Equilibrium Quantity
The quantity demanded equals quantity supplied at the equilibrium price ## Footnote Graphically, the equilibrium price and quantity is indicated by the intersection of the supply curve and the demand curve
30
Surplus
At any price above equilibrium price; quantity supplied exceeds quantity demanded | Excess supply
31
Shortage
At any price below equilibrium price; quantity demanded exceeds quantity supplied | Excess demand
32
Rationing Function of Prices
The ability of the competitive forces of supply and demand to establish a price at which selling and buying decisions are consistent
33
Efficient allocation
* Productive efficiency: the production of any particular good in the least costly way * Allocative efficiency: the production of a particular mix of goods most higly valued by society. MB = MC
34
Increase in demand
An *increase* in demand raises both equilibrium price and equilibrium quantity | D↑: P↑ and Q↑
35
Decrease in demand
A *decrease* in demand reduces both equilbirium price and equilibrium quantity | D↓: P↓ and Q↓
36
Increase in supply
An *increase* in supply reduces equilibrium price but increases equilibrium quantity | S↑: P↓ and Q↑
37
Decrease in supply
A *decrease* in supply increases equilibrium price but reduces equilibrium quantity | S↓: P↑ and Q↓
38
Both Demand and Supply increase
* E Price is uncertain * E Quantity increases | Price is uncertain - both demand and supply behave the same
39
Demand increases and Supply decreases
* E Price increases * E Quantity is uncertain | Quantity is uncertain when demand and supply behave differently
40
Demand decreases and Supply increases
* E Price decreases * E Quantity is uncertain | Quantity is uncertain when demand and supply behave differently
41
Both demand and supply decrease
* E Price is uncertain * E Quantity decreases | Price is uncertain - both demand and supply behave the same
42
Consumer Surplus
The difference between the maximum price a consumer is willing to pay for a product and the actual price * Consumers gain greater utility in rand terms from their purchases than the amount of their expenditures (product price x quantity) * many consumers would be willing to pay more than the equilbrium price to obtain a product | The benefit surplus received by consumers in a market ## Footnote Consumer surplus = max price - actual price
43
Consumer Surplus and Price are: | (relationship)
inversely related | higher prices reduce consumer surplus (and vice versa)
44
Producer Surplus
The difference between the actual price a producer receives and the minimum acceptable price * most sellers are willing to accept a lower than equilibrium price to sell the product | The benefit surplus received by producers in a market ## Footnote Producer surplus = Actual price - Min price
45
Producer surplus and price are: | (relationship)
directly related | lower prices reduce producers surplus (and vice versa)
46
Allocative efficiency occurs at quantity levels where:
1. MB=MC 1. Maximum willingness to pay = Minimum acceptable price 1. Combined consumer and producer surplus is at a maximum | producing the right things
47
Efficiency losses ## Footnote also called deadweight losses
The reductions of combined consumer and producer surplus associated with underproduction or overproduction of a product ## Footnote quantities higher or lower than the efficient quantity create efficiency losses
48
Government-set prices: Price ceilings
A price ceiling sets the maximum legal price a seller may charge for a product or service ## Footnote e.g. rent controls. A price ceiling must be below Eq Price
49
# Government-set prices Rationing Problem
Since an unregulated shortage does not lead to an equitable distribution of a product, the government must establish some formal system for rationing it to consumers
50
# Government-set prices Black markets
Buyers are willing to pay more than the ceiling price. So the product is illegally bought and sold at prices higher than the legal ones
51
# Government-set prices Rent controls
* Goal: to protect low income families from escalating rents caused by perceived housing shortages - however, rent controls distort market signals and thus resources are misallocated * As rents are below equilibrium, more families are willing to consume rental housing (demand increases) * Price controls make it less attractive to landlords to offer housing on the rental market. | Too few resources are allocated to rental housing
52
Government-set prices: Price Floor
Minimum price fixed by the government e.g. Minimum wage An imposed legal price disrupts the rationing ability of the free market | lead to surplus

EKN (8 decks)

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