tci - chapter 5

supply shifter def

a factor other than price that can cause a change in supply of a good or service (examples include changes in technology and government policy)

As price increases, what does quantity do? As price decreases, what does quantity do?

As price increases, quantity increases. As price decreases, quantity decreases.

When a product is perceived as a necessity, does its demand tend to be highly inelastic or highly elastic? What about demand for luxuries?

Demand for necessities tends to be inelastic. Demand for luxuries tends to be elastic.

A demand shifter can lead to... A change in price can lead to...

- a shift in the demand curve left or right, causing an increase or a decrease in demand at every point/price along the demand curve. - movement along the demand curve.

Supply can be affected by what three factors? (think of the past few flashcards)

1. Availability of inputs. 2. Mobility of inputs. 3. Storage capacity. 4. Time needed to adjust to a price change. (The supply of many products is inelastic when the price actually changes, but it may become more elastic with the passage of time.)

What are the four factors that influence elasticity of demand? (think of the past few flashcards)

1. Availability of substitutes. 2. Price relative to income. 3. Necessities versus luxuries. 4. Time needed to adjust to a price change.

What are the six supply shifters?

1. Changes in the cost of inputs. 2. Changes in the number of producers. 3. Changes in conditions due to natural disasters or international events. 4. Changes in technology. 5. Changes in producer expectations. 6. Changes in government policy.

What are the two ways changes in government policy can impact supply, and why?

1. Offering a subsidy - a subsidy is a cash payment aimed at helping a producer to operate, so it increases farmers' incentive to produce a certain way 2. Putting on a excise tax - an excise tax is a tax on the manufacture or sale of a good, adding to the production cost thereby causing supply to decrease.

What are the two reasons the law of supply exists?

1. Production decisions by existing producers. 2. Market entries and exits (by producers)

How does a change in supply impact the supply curve?

A change in supply causes the entire supply curve to shift to a new position, either to the left or right.

Why would changes in the cost of inputs impact supply?

A change in the cost of production will result in a change in market supply because producers want to maximize profit.

What six changes might cause a shift in demand?

A change in... - consumer income (ex. good economy leads to higher income leads to higher demand) - the number of consumers - consumer tastes and preferences (ex. demand for sushi has greatly increased in the past 30 years) (advertising also shapes consumer preferences) - consumer expectations (ex. you go to the store with the intention of buying a video game, but the game is going on sale next week. because of your expectation of a sale, you lessened your demand for the video game) - the price of substitute goods (ex. if the price of tacos stays the same but the price of burritos decreases, demand for tacos might go down while demand for burritos increases) - the price of complementary goods. (ex. if the prices of tennis rackets increases, the demand for tennis balls might decrease as a result)

What does a revenue table list?

A revenue table lists the (1) various prices of a given product along with the (2) quantity expected to sell and (3) the revenue that would be earned by the producer at each price.

An increase in demand shifts the demand curve to the right or left? What about a decrease in demand?

An INCREASE in demand shifts the demand curve to the RIGHT. A DECREASE in demand shifts the demand curve to the LEFT.

How might a natural disaster, such as a drought in Florida impact supply? What about a war?

Drought in Florida would decrease supply, as producers of orange juice would supply fewer cartons of juice at every price. War can also decrease access to those resources, which als would decrease how much of a product a producer can supply.

If wheat farmers predict their crop will sell for more in the future, how might supply change?

Ex: If wheat farmers predict crop prices to rise, they might take part of their crop off the market and put it into storage so they can sell more when the price is higher. Expecting higher prices in the future, wheat farmers would supply less to the market today and more later.

How does storage capacity affect supply elasticity?

How easy it is to store products as they move through the supply chain is important because producers might want to be able to decide when to hold back versus sell out their products based on pricing.

Price and quantity have what type of relationship?

Inverse. When As the price of a good or service increase, the quantity demanded decreases, and vice versa.

How does the mobility of inputs impact supply elasticity?

Mobility affects the ease with which inputs and products move through the supply chain, therefore changing the timing of supply and how producers react to price changes.

What is the income effect?

People's incomes are limited. We only have so much money to spend, so if prices rise and people's incomes stay the same/decrease, they will not be able to continue buying the same quantity as they originally did.

What is the substitution effect?

Sometimes two different goods can satisfy the same want. Many prefer to substitute cheaper goods for more expensive ones.

How do changes in the field of technology impact supply? Provide an example.

Technological advances can reduce the amount of labor needed to produce a good, thereby lowering costs and increasing productivity. ex: robot-lead assembly lines

Provide an example for how changes in the amount of producers impacts supply - tablet example

The iPad's success attracted many other producers to make tablets, so the market supply of tablets increased dramatically

How might the availability of inputs impact supply elasticity (when will supply be elastic vs inelastic)?

The inputs needed at the beginning of the supply chain need to be readily available for the supply of a product to be elastic. If key raw materials or other essential inputs are less available, supply is likely to be inelastic

How do demand and price interact, as per the law of demand?

The law of demand states that as the price of a good or service increases, the quantity demanded increases. As price decreases, quantity demanded increases. The inverse relationship of quantity demanded and price can be shown in a demand schedule and graphed on a demand curve.

What are the three factors that explain why price and quantity move in opposite directions?

The law of diminishing marginal utility, the income effect, and the substitution effect

What does the law of diminishing marginal utility tell us about most people's consumption of goods and services?

The more we have already consumed, the less satisfaction we are likely to get from consuming yet another additional unit.

What two groups use the total revenue test and why?

The total revenue test is used by producers to gauge the impact of a change in price on revenues earned; It is also used by economists to determine the elasticity of demand for a good or service.

When are consumers more responsive to changes in price? (consider the price/occasion of the items)

When buying expensive/"big ticket" items rather than when making minor purchases

What does it mean if demand elasticity is calculated to be larger than 1? Smaller than 1?

When demand elasticity is calculated to be larger than one, it is said to be elastic. When less than one, it is said to be inelastic.

When do price and total revenue move in the same direction? When do price and total revenue move in different directions?

When demand is INELASTIC, price and total revenue move in the SAME DIRECTION. When demand is ELASTIC, price and total revenue move in OPPOSITE DIRECTIONS.

When demand is elastic, how do people react to change in price? What about when demand is inelastic?

When demand is elastic, people react more strongly to a change in price and demand for a product changes. When demand is inelastic, demand is largely unchanged as people are unresponsive to change in price.

When profit is low, how is motivation to produce affected? What does this mean for supply?

When profit is low, motivation to produce is lower, meaning the supply will be lower.

When supply increases, the supply curve shifts to the... When supply decreases, the supply curve shifts to the...

When supply increases, the supply curve shifts to the RIGHT. When supply decreases, the supply curve shifts to the LEFT.

supply curve def + what x and y represent

a GRAPH that shows the relationship between price and the quantity that producers are willing and able to supply x axis represents the quantity per unit of time (ex. tacos per week) y-axis represents price per product (ex. price per taco)

supply schedule def

a TABLE that shows the quantities supplied at different prices in a market

demand curve def

a graph of the relationship between the price of a good or service and the quantity buyers are willing and able to buy (eg. shows how price influences the quantity demanded)

demand schedule def

a list of the quantities of a good that one person will buy at various prices (ex: as the price on the graph increases, the quantity of tacos that Tyler is willing and able to buy decreases)

elasticity of supply definition

a measure of the sensitivity of producers to a change in price

substitute goods def

a product that satisfies the same basic want as another product

A change in supply shifters can lead to...

a shift in the supply curve

Elasticity of demand can change gradually as people take time to... Provide an example involving rising gas prices.

adjust their spending habits. ex. When gas prices rise, people started using more public transportation, carpooling, and buying smaller cars. Demand for gas gradually became more elastic.

What is the law of supply?

an economic law stating that as the price of a good or service increases, the quantity supplied increases, and vice versa

A flat supply curve implies...

an elastic supply

A producer whose supply is elastic will likely respond to an increase in price with...

an increase in quantity supplied

change in demand, as defined by economists + what it represents on a demand curve

an increase or decrease in demand caused by a change in factors OTHER THAN PRICE; AKA a shift in the demand curve to the left or right.

change in quantity demanded def

an increase or decrease in quantity demanded as a result of change in price.

change in quantity supplied def

an increase or decrease in quantity supplied as a result of a change in price. Causes movement along the curve.

change in supply def

an increase or decrease in supply as a result of a change in factors OTHER THAN PRICE; a shift of the supply curve to the left or right.

A steep supply curve implies..

an inelastic supply

law of demand def

as the price of a good or service increases, the quantity demanded decreases, and vice versa

What two conditions must buyers meet in order for there to be demand for a good or service?

buyers must be both willing AND able to pay for it

change in quantity supplied has to do with... change in supply has to do with...

change in price. factors other than price.

Suppose the price of energy bars rose 50%, and consumers reacted to this price increase by buying 80% fewer bars. What would the elasticity calculation look like?

demand elasticity = 80% / 50% - equals more than one, therefore is elastic (meaning this change in price impacted the demand)

Demand elasticity equals what percentage divided by what other percentage?

demand elasticity = percentage change in quantity demanded / percentage change in price.

A flat demand curve implies...

elastic demand.

Demand for products that have close substitutes tends to be...

elastic.

A steeper demand curve implies...

inelastic demand.

A change in price can lead to...

movement along the supply curve.

inelastic def

not responsive, or only slightly responsive, to a change in price (applied to either supply or demand)

unitary elastic demand def

occurs when the percentage change in the quantity demanded of a good or service EQUALS the percentage change in price; a demand elasticity equal to exactly 1

complementary goods def

products that are consumed along with some other product (ex. tennis balls and rackets)

Price and quantity always move in the...

same direction

Supply elasticity equals what percentage divided by what other percentage?

supply elasticity = percentage change in quantity supplied / percentage change in price.

quantity supplied def

the AMOUNT of a good or service that producers are willing and able to offer for sale at a SPECIFIC price.

quantity demanded def

the amount of a good or service that consumers are willing and able to buy at a specific price

demand def

the amount of a good or service that consumers are willing and able to buy at all prices in a given period

supply def

the amount of a good or service that producers are willing and able to offer for sale at ALL prices in a given period

elasticity (in terms of the economy) def + favorite candy example

the degree to which a quantity demanded or a quantity supplied changes in response to a change in price - ex. If your favorite candy increased in price, you might decide to buy something else instead. Your demand in the case would be elastic, or responsive to a change in price.

supply chain def

the network of people, organizations, and activities involved in supplying goods and services to consumers.

Unitary elastic supply occurs when...

the percentage change in the quantity supplied of a good or service equals the percentage change in price; having a supply elasticity equal to 1.

market demand def

the sum of all the individual quantities demanded in a market (when economists refer to demand, they are usually talking about market demand)

market supply def

the sum of all the individual quantities supplied in a market (meaning, supply considering multiple producers of a single product) (when economists refer to supply, they are usually talking about market supply)

demand is expressed in terms of a...

time frame (ex. "per day" or "per week") (ex: if you just said "315,000 copies of the album were sold" that would mean nothing to an economist, you need to specify a time frame)

total revenue def + how to calculate it

total revenue is the total amount received by a business for selling a good or service; its calculated by multiplying the quantity of a good or service sold by its price quantity * price = total revenue for a business