Exam One - Chapter Three (Supply and Demand)
Exam One - Chapter Three (Supply and Demand) Econ 2106
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This 3 page Study Guide was uploaded by Joana Marie on Sunday September 18, 2016. The Study Guide belongs to Econ 2106 at Georgia State University taught by Professor Carycruz Bueno in Fall 2016. Since its upload, it has received 72 views. For similar materials see PRINCIPLES OF MICROECONOMICS in Microeconomics at Georgia State University.
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Date Created: 09/18/16
Microeconomics Exam #1 Chapter 3 Study Guide Elite Notetaker: Joana Marie Cruz Exam Date: September 22, 2016 Microeconomics/ECON 2106 Definitions: 1. Market – a collection of buyers and sellers of a particular product or service 2. Competitive Market – a market in which there are so many buyers and sellers that each has only a small impact on the market price and output (the impact is almost negligible) 3. Imperfect Market – a market in which the buyer or seller has an influence on the market price 4. Law of Demand – as price increases, the quantity demanded decreases (and vice versa); there is an inverse relationship 5. Demand Curve – a graph of the relationship between the prices in the demand schedule and the quantity demanded of those prices 6. Market Demand – the sum of all the individual quantities demanded by each buyer in a market at each price 7. Normal Goods – goods that are purchased when incomes go up 8. Inferior Goods – goods that you purchase less of when income goes up; goods that are purchased out of necessity rather than choice 9. Complements – two goods that are used together 10. Substitutes – two goods that are used in place of each other 11. Law of Supply – as quantity increases, price increases; there is a direct relationship 12. Supply Curve – a graph of the relationship between the prices in the supply schedule and the quantity supplied at those prices 13. Market Supply – the sum of the quantities supplied 14. Inputs – resources used in the production process 15. Subsidy – a payment made by the government to encourage the consumption or production of a service 16. Taxes – an amount of money demanded by the government 17. Shortage – quantity supplied is less than quantity demanded 18. Surplus – quantity supplied is greater than quantity demanded 19. Equilibrium – the point at which the demand and supply curve intersect; 20. Equilibrium Price / Market Clearing Price – the price at which there are no shortages or surpluses 21. Equilibrium Quantity – the quantity at which there are no shortages or surpluses Important Concepts: 1. When it comes to demand, there is an inverse relationship when quantity increases, price decreases, when quantity decreases, price increases 2. A shift to the right means an increase in demand, a shift to the left means a decrease in demand a. The only factors that shift the demand curve are the determinants of demand b. Price is not a demand shifter; When there is a change in price, there is not a shift in the demand curve, there is a movement along the demand curve 3. Determinants of Demand: Change in Income o Normal Goods and Inferior Goods come into play Ex. CocaCola would be a normal good, store brand ‘Cola’ would be an inferior good; Steak would be a normal good, Spam would be an inferior good Changes in Tastes and Preferences o Demand is likely to go up if it is popular/in style Ex. iPhones are in higher demand than Androids because of its popularity Price of Related Goods o Complements and Substitutes are involved Ex. Peanut butter and jelly are complements because they are usually bought together; For those who don’t have a particular preference, Coke and Pepsi are substitutes Related Good Price of Good X Demand of Good X Demand of Good Y Complement Increases Decreases Decreases Complement Decreases Increases Increases Substitute Increases Decreases Increases Substitute Decreases Increases Decreases Expectations Regarding the Future Price o If people believe that the price is going to be cheaper in the future, they are more likely to purchase the product in the future Number of Buyers in the Market o More buyers = higher demand o Demographics can be a factor in the number of buyers in a market Ex. Countries with different aging populations have different demands 4. When it comes to supply, there is a direct relationship when quantity increases, price increases; when quantity decreases, price decreases 5. A shift to the right means an increase in supply, a shift to the left means a decrease in supply a. The only factors that shift the supply curve are the determinants of supply b. Price is not a supply shifter; When there is a change in price, there is not a shift in the supply curve, there is a movement along the supply curve 6. Determinants of Supply: Improvements in Technology and the Production Process o Improvements in technology allow for an increase in supply and production Taxes and Subsidies o Taxes causes businesses to lose money, which takes away from their supply production; Subsidies, or money from the government, allows businesses to produce more because of the money they received Number of Firms in the Industry o The more firms there are producing for the market, the more supply there is in the market Cost of Inputs o The cost of the materials needed to make a product (the inputs) plays a role in the amount supplied Ex. In order to make lemonade, you need lemon, water and sugar. However, the price of sugar increases which slows the production of lemonade. Price Expectations o If a seller thinks that his or her product will be bought at a higher price in the future, they will delay the sales and production of their product until the time comes in which their product will be bought at that higher price 7. The intersection between the demand curve and the supply curve is known as equilibrium. a. At equilibrium, supply and demand are perfectly balanced b. The quantity demanded matches the quantity supplied perfectly c. However, there are states that exist outside of the equilibrium i. A shortage exists below the equilibrium. The quantity supplied is less than the quantity demanded. In order to correct a shortage, one must raise its prices. ii. A surplus exists above the equilibrium. The quantity supplied is greater than the quantity demanded. In order to correct a surplus, one must lower its prices.
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