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Micro: Chapter 3
Test 1
| Term | Definition |
|---|---|
| "perfectly" competitive market | enough buyers and sellers that no one individual has influence over the price (aka the price at which goods are sold); ex = agriculture (can't set own price, even if some fluctuation, pretty much about the same) |
| example of a non competitive market | airlines (anyone can raise/lower price a little bit and affect market); sodas (dominated by Pepsi and Coke) |
| 5 elements of a supply and demand model | demand curve; supply curve; set of factors that can shift demand/supply curves; market equilibrium; way market equilibrium shifts when curves shift |
| demand analysis | how much of a good do people want to buy at a given price; DEMAND = BUYERS |
| demand schedule | list of prices and demand |
| demand curve | graphed representation of the demand schedule; x-axis is quantity demanded, y-axis is price; slope will always be negative; relationship btw price and quantity demanded |
| law of demand | the higher the price, the less people are willing to buy the good; as price goes down, more people are willing to buy |
| quantity demanded | the actual amount consumers are willing to buy a good at some specific price |
| 2 kinds of change... | change in demand vs change in quantity demanded |
| change in demand (definition) | actual movement of the curve to tell new relationship btw p&q |
| change in quantity demanded (definition) | moving along on an existing curve; driven by changes in price; CURVE DOESN'T SHIFT |
| changes in income | if income increases, quantity demanded will increase/decrease depending on whether the good is normal or inferior |
| normal goods | as income goes up, so does demand; the more income you have, the more you want of it; ex= diamond rings, trips to a resort |
| inferior goods | as income goes up, demand drops; if I become more wealthy I buy less of something; ex= Ramen noodles, fast food |
| things that cause a change in demand | Δ price of related goods; Δ income; Δ tastes/preferences; Δ expectations; Δ # of consumers |
| things that cause a change in quantity demanded | Δ PRICE; NOTHING BUT A CHANGE IN PRICE |
| changes in price of related goods/services | involves concept of substitutes and complements |
| substitutes | goods that in some way serve a similar function; increase in price of A means increase in demand of B; people will spend their money on one or the other (and they'll choose the cheaper one); ex: movies at home vs theater; bc A more $, 'substitute' A for B |
| complements | goods that in some sense are consumed together; increase in pride of A means decrease in demand of B; bc A&B like a package deal, if one gets expensive, won't purchase other either; ex = hot dogs and hot dog buns; DVD players and DVDs |
| changes in income | if income increases, quantity demanded will... if normal, up (more income you have, more you want); if inferior, down (more income you have, less you want) |
| EX: demand for ketchup if price of hamburger drops | demand up; complements |
| EX: demand for DVD players if price of Blu Ray players drops? | demand down; substitutesf |
| changes in taste | people want more/less of something at any given time; changes in demand bc Δ... fads, beliefs, cultural shifts; fads come and go; ex: poodle skirts, Mark McGuire Baseball card |
| changes in expectations | current demand often affected by expectations about future price; changing demand before something actually happens; what you expect can cause changes in demand; ex: bottled water before a hurricane, about to get an income raise |
| EX: Iced coffee during the winter | change in taste |
| changes in number of consumers | the more consumers participate in a certain market, the more demand there will be |
| individual demand curve | illustrates the relationship between quantity demanded and price for an individual consumer |
| market demand curves | the horizontal sum of the individual demand curves of all consumers in a market; the more people you add, the more demand you will have |
| EX: sale of coffee at daily grind in summer vs school year | changes in number of consumers |
| quantity supplied | actual amount of a good or service people are willing to sell at some specific price; at any given $, how much are producers willing to supply |
| supply schedule | works same way demand schedule does, but with supply |
| supply curve | works in similar way to demand curve; shows relationship between quantity supplied and price; SUPPLY = SELLERS |
| law of supply (?) | supply curves normal slope upward; the higher the price being offered, the more of any good/service producers will be willing to sell |
| shift of the supply curve (definition) | change in the quantity supplied of a good or service at any given price. represented by change of original supply curve to a new posItion; DEMAND CHANGES W/SAME PRICE |
| movement along the supply curve (definition) | changes in the quantity supplied arising from a change in price |
| things that cause a change in supply | Δ input prices; Δ price of related goods/services; Δ technology; Δ # of producers; Δ expectations (not talked about in class) |
| things that cause a change in quantity supplied | Δ PRICE AND ONLY Δ PRICE (movements along an existing line) |
| changes in input prices | an increase in the price of an input makes the production of the final good more costly for those who produce and sell it; as what you're using becomes more $, will sell product for more (and vice versa); ex: airline ticks and cost of fuel goes up |
| input | good/service that is used to produce another good/service |
| change in the prices of related goods or services | very similar to that of the demand curve; involves substitutes in production and complements in production |
| substitutes in production | must choose between 1 option or the other (ex: Honda can either make a Civic or an Accord); if $ of substitute good goes up, make more of it at expensive of other good; $ of A rises = ↑production A, ↓production B |
| complements in production | making one facilitates the making of the other (ex: lumber and sawdust); price of lumber ↑, make more lumber, produce more sawdust as a result (even if price of sawdust didn't change) |
| changes in technology | even if price to produce doesn't change, tech. can still make it cheaper to produce; when better tech is available, reducing cost of production, supply increases, supply curve shifts to the right; ex: assembly line for box maker |
| changes in expectations | changes in the expected future price of the good can lead a supplier to supply less or more of the good today |
| changes in number of producers | as you keep adding suppliers, you will continue to push the quantity supplied out further on the graph |
| individual supply curves | illustrates relationship between quantity supplied and price for an individual producer |
| market supply curve | combined total quantity supplied by all individual producers in the market depends on the market price of that good; horizontal sum of all individual supply curves of all producers |
| EX: hydrofracking and supply of oil | it's an advance in technology; makes it cheaper to produce, so at any given price, sellers are willing to sell more |
| EX: hydrofracking and natural gas | oil and natural gas are compliments in production; supply curve shifts outward (right) |
| EX: drop in sugar price and supply of chocolate | change in input prices; cost of production is less, so at any given price, more firms are willing to produce and supply chocolate (bc it's cheaper to make now) |
| EX: new restaurant opens and supply of friend appetizers? | change in number of producers; increase in number of suppliers means an increase in the number of available appetizers at any given price |
| Why do markets move toward equilibrium? | "invisible hand" desire to do as well as possible surplus wise; indiv who do as well as possible pushes toward equilibrium; every buyer that wants to by = sellers that want to sell; no deals that could make either better off w/out making other worse off |
| Price will move until... | no seller can improve by selling at a cheaper price; no buyer who would've been willing to buy something w/out a high price; quantity of goods demanded = quantity of goods supplied |
| equilibrium price (market clearing price) | everyone who wants to sell has sold and everyone who wants to buy has bought; everyone else, at this price, you're not playing (people who haven't made deals/can't afford to make deals); Qd=Qs |
| equilibrium quantity | number of deals that occur at the equilibrium price |
| market price | in any well-established, ongoing market, all sellers receive and all buyers pay approximately the same price; market price; as market continues on, harder to exploit big differences |
| seller asks for abnormally high price? | at beginning buyers don't know better; as you continue, you know it's too high and can buy for cheaper else where |
| buyers asks for abnormally low price? | at beginning, sellers don't know better; as you continue, sellers are less likely to accept such a low price if they know they can sell for higher |
| surplus | Qd < Qs; more stuff lying around at that price that there are people willing to buy; occurs above the intersection on the graph; downward pressure on price (supplier lower price to get people to buy; as sellers drop down, more buyers become interested) |
| shortage | Qd > Qs; more people want to buy a good then there are goods to go around; occurs below intersection on graph; upward pressure on price; buyers raise prices to entice sellers (some must drop out); as price increases, more sellers interested |
| reaching equilibrium recap | surplus (Qd < Qs) = price drop shortage (Qd > Qs) = price increase |
| shifts in the demand curve (effect of equilibrium price) | all else held constant, if demand shifts out (right) = ↑demand, ↑price, ↑quantity; if demand shifts in (left) = ↓demand, ↓price, ↓quantity |
| shifts in the supply curve (effect of equilibrium price) | all else held constant, if supply shifts out (right) = ↑supply, ↓price, ↑quantity; if supply shifts in (left) = ↓supply, ↑price, ↓quantity |
| general rule: was in a shift in demand or shift in supply? | demand curve shift = quantity/price in same direction supply curve shift = quantity/price in different directions |
| what happens if they both change? | ↑D and ↓S ↑$, Q ambiguous ↑D and ↑S $ ambiguous, ↑Q ↓D and ↑S ↓$, Q ambiguous ↓D and ↓S $ ambiguous, ↓Q ambiguous? depends on which curve's magnitude of change was larger |
| to recap... | curves move opposite direction = $ known curves more same direction = quantity known for ambiguous values --> depends on which magnitude is larger |
Created by:
nicook
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