question
When there is a surplus, price ______ (rises/falls). This happens because ____________________________.
answer
- falls
- inventories of the product are greater than the demand for the product, so suppliers will often lower the price of the product to reduce their inventories.
- inventories of the product are greater than the demand for the product, so suppliers will often lower the price of the product to reduce their inventories.
question
When there is a shortage, price ______ (rises/falls). This happens because ______________________________.
answer
- rises
- sellers see that buyers are clamoring for their goods, so they often raise the price of their goods.
- sellers see that buyers are clamoring for their goods, so they often raise the price of their goods.
question
Economic Equilibrium
answer
A condition or state in which economic forces (supply and demand) are balanced. (Supply of a product equals demand for the product).
question
How to solve for equilibrium:
answer
Set supply equal to demand and solve for the variable.
question
Maximum Buying Price
answer
How much consumers are willing to pay for a good (at the most)
question
Minimum Buying Price
answer
How much sellers are willing to sell their product for (at the very least)
question
Consumer's Surplus (CS)
answer
The maximum buying price minus the actual price being paid for a good
question
Producer's (Seller's) Surplus (PS)
answer
Price received for a good minus the minimum selling price
question
Total Surplus (TS)
answer
CS + PS
question
supply
answer
the willingness and ability of sellers to produce and offer to sell different quantities of a good at different prices during a specific period
question
law of supply
answer
as the price of a good rises, the quantity supplied of the good rises and as the price of a good falls, the quantity supplied of the good falls
question
slope of supply curve
answer
upward sloping
question
Why are supply curves upward sloping?
answer
the law of diminishing returns
question
supply schedule
answer
the numerical table of the quantity supplied of a good at different prices
question
factors that cause shifts in the supply curve
answer
prices of relevant resources
technology
price of related goods
number of sellers
expectation of future prices
taxes and subsidies
government restrictions
technology
price of related goods
number of sellers
expectation of future prices
taxes and subsidies
government restrictions
question
How do the price of relevant resources affect the supply curve?
answer
if the price of relevant resources decreases, the supply of the good will increase
question
How does a change in technology affect the supply curve?
answer
as technology increases, supply of the good will increase
question
How does the price of related goods affect the supply curve?
answer
change in price of one good can lead to a change in supply of another good
question
How does the number of sellers affect the supply curve?
answer
if the number of sellers increases, the supply will increase
question
How does the expectation of future prices affect the supply curve?
answer
if the price of a good is expected to be higher in the future, producers may produce less, causing the supply to decrease
question
How do taxes and subsidies affect the supply curve?
answer
increase is taxes causes supply to decrease and an increase in subsidies causes an increase in supply
question
How do government restrictions affect the supply curve?
answer
if the government sets a restriction in the good, then the supply will decrease
question
change in supply vs. change in quantity supplied
answer
a change in supply means a shift in the curve where a shift in quantity supplied means movement along the supply curve
question
surplus
answer
excess supply compared to demand
question
shortage
answer
excess demand compared to supply
question
equilibrium price
answer
the price at which the quantity demanded equals the quantity supplied
question
equilibrium quantity
answer
the quantity that corresponds to the equilibrium price
question
disequilibrium price
answer
any price at which quantity demanded is not equal to quantity supplied
question
market disequilibrium
answer
a market that exhibits either a surplus or a shortage
question
demand
answer
1. The willingness and ability of buyers to purchase different quantities of a good
- at different prices
- during a specific period of time
- at different prices
- during a specific period of time
question
Law of Demand
answer
Demand for a good rises when prices fall and falls when prices rise, ceteris paribus
question
quantity demanded
answer
the amount of a good or service that a consumer is willing and able to purchase at a given price
question
four ways to represent the law of demand
answer
1. In words
2. In Symbols (P⬆️ , Qd ⬇️ ; P ⬇️ , Qd ⬆️)
3. In a demand schedule (table)
4. In a demand curve (graph)
2. In Symbols (P⬆️ , Qd ⬇️ ; P ⬇️ , Qd ⬆️)
3. In a demand schedule (table)
4. In a demand curve (graph)
question
law of diminishing marginal utility
answer
consumers experience diminishing additional satisfaction as they consume more of a good during a given period of time
question
individual demand curve
answer
illustrates the relationship between quantity demanded and price for an individual consumer
question
market demand curve
answer
the demand curve that shows the quantities demanded by everyone who is interested in purchasing the product
question
change in quantity demanded
answer
movement along the demand curve showing that a different quantity is purchased in response to a change in price
question
shifts in the demand curve
answer
1. If demand increases, the curve moves to the right.
2. If demand decreases, the curve moves to the left.
2. If demand decreases, the curve moves to the left.
question
normal good
answer
a good that consumers demand more of when their incomes increase
question
neutral good
answer
a good for which demand does not change as income rises or falls
question
inferior good
answer
a good that consumers demand less of when their incomes increase
question
Factors that could shift the demand curve
answer
1. Income
2. Preferences
3. Price of related goods
4. Numbers of Buyers
5. Expectations of future prices
2. Preferences
3. Price of related goods
4. Numbers of Buyers
5. Expectations of future prices
question
Substitutes
answer
Goods that can be used for the same purpose; as the price for one rises (or falls), the demand for the other rises (or falls)
question
Complements
answer
two goods that are bought and used together; as the price for one rises (or falls), the demand for the other falls (or rises)
question
Consumer Surplus (CS) (How to Calculate)
answer
Max. buying price - price paid
~ or ~
Calculate the area of the green triangle (1/2 * bh)
~ or ~
Calculate the area of the green triangle (1/2 * bh)
question
Producers' (Sellers') Surplus (PS) (How to Calculate)
answer
Price received - min. selling price
~ or ~
Calculate the area of the red triangle
~ or ~
Calculate the area of the red triangle
question
Example Problem: Find the P (equilibrium price) and D (equilibrium demand) of the following:
Qd (Quantity Demanded) = (50-p)/3
Qs (Quantity Supplied) = (p-5)/1.5
Qd (Quantity Demanded) = (50-p)/3
Qs (Quantity Supplied) = (p-5)/1.5
answer
- Set the two terms equal to each other
- Solve for "p"
- p = 20
- Plug 20 for "p" back into the original equations in order to solve for "q"
- q = 10
- Solve for "p"
- p = 20
- Plug 20 for "p" back into the original equations in order to solve for "q"
- q = 10
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