week 2 Flashcards
(21 cards)
A team of analysts at Amazon is researching the viability of producing a smart watch. How might they estimate potential demand for their smart watch? What kinds of factors would the analysts want to keep in mind to create the most accurate estimates?
Step one: Survey customers, asking them about their possible purchase decision at different prices given features and specifications of the product.
Step two: At each price point, add up the total quantity demanded by the customers.
Step three: Scale up the quantities demanded by the survey respondents so that they represent the entire market.
Step four: Plot the demand curve from your data.
The kinds of factors to keep in mind include existing competition in the market, the income of the average demander in your market, current trends in wearable fashion, and expectations of the future
. For each of the following pairs of goods, identify if they are substitutes or complements and describe the trend that would occur in a graph and how the change described impacts the markets for both goods or services.
a. Gasoline and sport utility vehicles (SUVs): The price of gasoline increases.
b. Taking a train or plane between NYC and Washington, DC: The price of airfare increases.
c. A smartphone and a Verizon data plan: The price of a monthly data plan increases.
a) they are complements. Thus if the price increases for gasoline this would mean the new price would increase left on the same demand curve and would then cause of a left shift in the demand for SUV’s
b) substitutes. so due the increase in price of airline the new price would increase left on the same demand curve and a shift to the right in demand in train tickets
c) complements. price increase in data plans the new price would increase left on the same demand curve and would then result in a left shift in the demand curve indicating less demand for smartphones
what is the law of supply
The law of supply is a fundamental principle of economic theory which states that, keeping other factors constant, an increase in sales price results in an increase in quantity supplied
The market supply for natural gas is the sum of all prices that natural gas producers are willing and able to sell at for every quantity.
The market supply curve displays the total amount of natural gas offered to consumers by all producers in the market at every price. Since suppliers naturally have different costs of production, they offer varying quantities of product at each market price. The market supply for natural gas is thus the sum of the quantities that natural gas producers are willing and able to sell at every price. If more producers enter the market, the market supply will increase, and if producers exit the market, the market supply will decrease.
how do you derive the market supply?
you add together the market supply of all firms at each price.
. Briefly explain whether each of the following represents a shift in supply or a change in quantity supplied. describe the change that would occur in a graph to illustrate your answer.
A. An increase in the use of corn in the production of ethanol has raised the cost of corn to farmers who use it as livestock feed.
b. Speculators in world steel markets push the price of steel up, leading American steel companies to expand production
a) due to the increased demand for corn the price is driven up When the price of an input increases, supply decreases, represented by a leftward shift of the supply curve. this results in a left shift in the supply of corn
B) Increased demand in the commodities market has increased the price of steel. As a result, American steel producers increase their quantity supplied by moving along their supply curve to the higher price
when we illustrate a demand curve what stays constant
all things stay constant. Only price changes
what is diminishing marginal benefit?
each additional item yields smaller marginal benefit
what are the factors of the demand curve that shift the market and individual markets ?
Incomes, price of related goods(complements and substitutes) , preferences, expectations
what factors only shift market demand?
Number of buyers
what will an increase in income do to demand for different types of goods?
An increase in income will cause an increase in demand for normal good but will lead to a decrease in demand for inferior goods
Inferior goods like bus travel,Generic brand groceries
Normal goods like luxury
what does changes in preferences do to demand?
Changes in preference causes shifts in demand curve this is like trends
what is a congestion effect?
The effect that occurs when a good becomes less valuable because other people use it. If more people buy such a product, your demand for it will decrease.
this is also know as the free rider problem
what is the network effect?
The effect that occurs when a good becomes more useful because other people use it. ▪ If more people buy such a good, your demand for it will also increase
what are the four characteristics of a perfectly competitive market
All firms sell an identical good
Many buyers and many sellers
firms have Small relative market share
Price setters only charge at the market price
what is the marginal principle?
decisions about quantities are best made incrementally
what is the cost benefit analysis?
Decisions depend on the balance of marginal benefits and marginal costs
Produce one more unit if marginal benefit I higher than marginal cost
what happens when price is equals to marginal cost.
you stop producing because price = demand = marginal benefit
So this is the cost benefit principle. This is the rational rule for sellers.
So this means that the supply curve is going to be equal to marginal cost.
Because if you are maximizing profit you will always keep selling until price equals marginal cost
The supply curve, therefore, shows the quantity sold at every price, which is also the marginal cost.
The supply curve is upward sloping because of increasing marginal costs. As you increase the quantity you produce, the marginal cost of producing an extra unit rises because of diminishing marginal product ( leas to rising marginal costs)
Rising input costs also leads to rising marginal costs
what happens when price change on a supply curve?
A price change causes movement from one point on a fixed supply curve to another point on the same curve.
Also a change in quantity supplied also causes a movement along the supply curve
what causes a shift in the supply curve?
Increase in supply will shift curve to the right
Decrease to the left
what factors can shift the supply curve?
productivity and technology growth that occurs when business are more efficient as they can have better factors of production
Input prices - when suppliers change prices of inputs they change your marginal costs. High inputs will shift to the left low input prices shift to the right
prices of related outputs - substitutes in production if there price decreases it means that supply will shift to the right.
if complementary goods in production are high then supply will shift to the right
Expectations- if they expect prices will increase next year supply curve will shift to the left if they think it will be lower it will shift to the right
Number of sellers – more sellers will shift supply to the right. Less sellers will shift it to the left
