Economics Quiz 1: Chapter 4

Price equilibrium

(market clearing price) price that balances quantity demanded and quantity supplied.

Perfectly Competitive Market

- Goods offered for sale are exactly the same - Buyers and sellers are so numerous that no one buyer or seller can influence price (price takers) Ex. agriculture

Steps to analyze impact of some event on market equilibrium

0. Draw neatly graphs and label axis 1. Decide whether shifts S or D or Both 2. Decide in which direction curve shifts 3. Use the supply and demand diagram to see how the shift changes equilibrium price and quantity

Inferior Good

Good for which, other things equal, an increase in income leads to a decrease in demand

Normal Good

Good for which, other things equal, an increase in income leads to an increase in demand

Demand Curve

Graph of relationship between price and quantity demanded with price on vertical axis and quantity demanded on horizontal axis. DOWNWARD SLOPING DUE TO LAW OF DEMAND.

Change in demand vs change in quantity demanded

Change in demand is represented with movement OF curve, change in quantity demanded represented with movement ALONG the curve

Supply Curve

Graph of relationship between price and quantity supplied with price on vertical axis and QS on horizontal axis. UPWARD SLOPING DUE TO LAW OF SUPPLY

Law of Supply and Demand

If price above equilibrium, surplus, price goes down, if price below equilibrium, shortage, price goes up.

Quantity Demanded

The amount of a good buyers are willing and able to purchase.

Demand Schedule

Table showing relationship between price of good and quantity demanded.

Quantity Supplied

Amount of a good that sellers are willing and able to sell.

Supply Schedule

Table that shows the relationship between the price of a good and the quantity supplied.

Change in the price of a good

Movement ALONG the demand/supply curve (Change in input prices for sellers or income for buyers shifts demand or supply curve)

Law of Demand

OTHER THINGS EQUAL, the quantity demanded falls when the price of the good rises.

Law of Supply

OTHER THINGS EQUAL, the quantity supplied of a goods rises when the price of the good rises.

Monopoly

Only one seller, price makers.

Shifts of Demand Curve

P (S/C) Y (N/I) N T E

Equilibrium

Point where quantity supplied equals the quantity demanded. Over time, market naturally moves to equilibrium.

Shifting Supply and Demand same time

Results in price or quantity ambiguous (DRAW TWO GRAPHS TO REPRESENT WHY AMBIGUOUS)

Market Demand

Sum of the quantities demanded for each individual buyer at each price.

Market Supply

Sum of the quantity supplied for each individual seller at each price.

Shifts of Supply Curve

T axes/subsidies I nput price P rice of related goods T echnology E xpectations N umber of sellers

Complements

Two goods for which an increase in price of one leads to an decrease in the demand for the other.

Substitutes

Two goods for which an increase in price of one leads to an increase in the demand for the other.