Economics Chp. 4-6 – Flashcards
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Customers buy more of a good when the price decreases unless when it price increases
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Define the law of demand
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When customers react to an increase in a good price by consuming less of that good and more of other goods ( coke to expensive, buy Sams)
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How does the Substitution effect work
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The change in consumption because of a change in income (can't afford pop, buy water)
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How does the income effect work
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Graphical representation of demand schedule always following the law of demand (y axis - price x axis -quantity) changes happen due to changes in areas other than price
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Demand curve illustrates what
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So they can agree to prices and quantity of the good that is traded
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Why do buyers and sellers need to communicate
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Something that a person is willing and able to buy
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What is demand
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shifts to the right - there is an increase in demand at each of the prices on the y axis shifts to the left - there is a decrease in demand at each of the prices on the y axis
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define shift in demand curve
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latin "all other things held constant"
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define ceteris paribus
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it will increase demand for goods (baby boomers need more cribs diapers, teenagers need clothing)
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how do changes in populations of people affect demand
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income. consumer, expectations, population, consumer tastes and advertisting
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four factors that cause a demand curve to shift
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one of the demands will increase while the other will decrease
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how does demand for one good effect demand for another good
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it you expect the price to go up you might buy it sooner if you think it will go down, you might buy it later
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how does expectations about the future change consumer behavior
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when income rises the demand for the product will increase; when income falls, the demand for the product will decrease
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how does an increase in income affect demand
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goods that consumers demand more of when their income increase (pay increase = buy 3 tacos not 2)
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define normal goods
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goods that consumers demands less of when their income increases (pay increase =stop buying)
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define interior goods
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two goods that are bought and used together
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define complements
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goods used in place of one another
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define substitutes
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a measure of how consumers react to a change in price
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define elasticity of demand
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Inelastic = less than 1 elastic = more than 1 unitary elastic = equal to 1
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the mathematical values of demand
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demand that is very sensitive to a change in price (movie ticket)
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define elastic demand
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demand that is not very sensitive to a change in price (gasoline)
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define inelastic demand
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it helps then to determine how a change in price will affect a firms total revenue by measuring how consumers respond to price changes for different products
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why do business owners study the use of elasticity
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availability of substitutes, relative importance, necessities v. Luxuries, change over time
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four factors that affect elasticity
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a person is more willing to purchase a good if it is considered a necessity
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how does a person's perception of whether a good is a luxury or a necessity affect the purchase of it
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candy bars = elastic -if the price is $1 people will buy it. If the price increases to $4 people won't buy it gas = inelastic - gasoline will be bought no matter the price
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difference of elastic and inelastic with examples
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in short term demand may be inelastic
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how does having a lot of substitutes for a good affect that good's elasticity
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if the price of the brand name apple juice increases, people will look for other alternatives that are cheaper
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why may the demand for a particular brand of apple juice be elastic
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when the quantity demanded or supplied of a good or services is unaffected when the price of that good or service changes
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define inelastic supply
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when the quantity demanded or supplied of a good or service is changed when the price changes
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define elastic supply
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inelastic = water, salt, diamonds, iphones, cigarettes elastic = luxury things cars, organic food
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identify products that have inelastic supply and elastic supply
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an increase in price results in a decrease in quantity supplied
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define the law of supply
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it is a graphical representation of a market supply; follows law of supply
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define a market supply curve
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a change in the cost of an input will impact the cost of producing a good and will result in a shift in supply
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how does supply change when price changes
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a schedule used to list supply of one good at various prices
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what is a supply schedule
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any measurement that helps to determine how an economy functions
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define variable
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the quantity of a commodity that producers are willing to sell at a particular price at a certain point in time
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define quantity supplied
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a table that lists he quantity supplied for a good or service that suppliers are willing to sell
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define market supply schedule
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the ratio of proportionate change in the quantity supplied to the proportionate change in price
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define elasticity of supply
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the supply would decrease
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what would happen to the quantity of goods produced if prices fall according to the law of supply
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when the marginal product of labor decreases as the number of workers increases
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when do diminishing marginal returns occur
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must find the biggest gap between total revenue and total costs
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how do manufacturers maximize profits
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the manufacturer will have no money to pay for bills and it will have to close down
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what happens when the marginal costs of making a product are greater than the market revenue
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If the total revenue is greater than the cost of keeping it open
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when should a company stay in a business even if it's losing money
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Fixed costs + variable costs
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how is total cost calculated
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the cost of producing one more unit of a good
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define marginal costs
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costs that rise or fall depending on how much is produced
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define variable cost
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costs that do not change no matter how much of a good is produced
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define fixed cost
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the change in output from hiring one additional unit of labor
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define marginal product of labor
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the additional income from selling one more unit of a good
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define marginal revenue
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fixed costs change depending on the quantity, variable costs rise or fall depending on the quantity
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explain the difference between fixed and variable costs
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it would lead to a higher marginal cost
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how do the changes in the cost of raw materials affect supply
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it can cause input costs to drop
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how does technology effect supply
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the supply curve for that good to shift to the right
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what does government intervention that results in an increased supply lead to
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farmers expecting prices to go up will hold off selling their crops
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how does the future expectations of the price of the good affect the current supply of that good
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because they want to be prepared in case food imports gets cut off
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why do European governments subsidize farming
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government payments that support a business
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define subsidy
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taxes on the production or sale of a good; they are designed to reduce the supply of a good
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define excise tax
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government intervention in a market that affects the production of a good
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define regulation
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a condition of rising prices
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define inflation
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suppliers hold on to their goods that will maintain their value rather than sell them for cash that is rapidly losing value when there is inflation
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explain the effect that inflation often has on producers and the supply of goods
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quantity demanded is more than quantity supplied
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what is excess supply
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its an example of a price ceiling when a government imposed situation where there is a maximum price that legally be charged for a good
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what is rent control
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minimum wage
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what is the price floor on earnings called
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whenever there is either excess supply or excess demand, market forces will work to create equilibrium
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the government will place price ceilings on essential goods to keep them from becoming too expensive for consumers
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a government imposed situation where there isa maximum price that can legally be charged for a good
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define price ceiling
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quantity demanded is more than quantity supplied
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define excess demand
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the point at which quantity demanded and quantity supplied are equal
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define equilibrium
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any price or quantity that is not at equilibrium
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define disequilibrium
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the market is stable; there is neither a surplus nor shortage
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describe the market in an equilibrium
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they will increase the price
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what do producers/stores do in regards to setting the price for their product when demand for the product is high
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falling prices affect supply in that the quantity demanded of the product rises
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it will lead to a higher quantity and lower prices
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what does new technology mean for the price of a good
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driving to another town
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identify and example of a search cost
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equilibrium is a situation in which the quantity demanded and the quantity supplied are the same
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there is either an excess supply or excess demand
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what happens when demand for a fad peaks and falls
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a situation in which quantity demanded in greater than quantity supplied
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define shortage
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products that reflect the impact of advertising and the consumers taste on consumer behavior
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define fad
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financial and opportunity costs consumers pay when searching for a good or service
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define search costs
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a situation in which quantity supplied is greater than quantity demanded
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define surplus
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shortages have fewer than demanded products while surpluses have an abundance of products
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what is the difference between a shortage and a surplus
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cost of production that affect people who have no control over how much of a good is produced
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what are spillover costs
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dividing up gods and services without regard to price (WWII gasoline, shoes, meat)
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what is rationing
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free-market systems have efficient allocation of resources because businesses operate for a profit
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price changes affect equilibrium by affecting the distribution of goods and services
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the soviet union had a command economy bc it was trying to create a society in which everyone was equal
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a market in which goods are sold illegally
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define black market
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an event that suddenly increase or decreases the supply of a service or good
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define supply shock
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prices are determined by unrestricted competition between privately owned businesses
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define free market
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bc prices are flexible and can solve the shock quickly and rationing is harder
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why is a change in price and not a change in production used to solve supply shock
