What is a competitive market?
A market in which there are many buyers and sellers of the same good.
What is the law of demand?
All other things equal (ceteris paribus), quantity demanded (QD) decreases when the price increases and vice-versa
What will a change in price do to demand?
It will cause a movement along the demand curve and a change in the quantity demanded (QD).
What are the five variables that will shift the demand curve?
1. Change in the price of related goods (substitutes or complements)
2. Change in income
3. Change in tastes / preferences
4. Change in population
5. Change in expectations about the future
1. What is a substitute? What does a change in price of a substitute good do to demand?
What is a complement? What does a change in price of a complimentary good do to demand?
1. A substitute is a similar good people are willing to consume instead. ex. Pepsi instead of Coke
A rise in the price of a substitute (Coke) will increase demand for the other good (Pepsi) and vice-versa
2. Complements are goods that are consumed together. ex. vehicles and gas
A rise in the price of a complement (gas) will decrease demand for the other good (cars), and vice-versa
What is the difference between a normal good and an inferior good?
When income rises, demand for normal goods increases (new cars, restaurant meals etc.), and vice-versa.
When income rises, demand for inferior goods decreases (spam, used cars, Walmart clothes etc.), and vice-versa.
Give two examples of how a change in expectations about the future will shift the demand curve?
1. A famous singer announces retirement, so consumers are willing to pay more for the tickets
2. If people expect house prices to rise in the future, demand today will increase. If house prices are expected to go down in the future, however, people will hold off buying today and demand (today) will decrease.
1. What does a change in quantity demaded refer to?
2. What does a change in demand refer to?
1. a movement along the curve
2. a shift of the curve.
What does the supply curve illustrate?
The quantity supplied, or the quantity producers are willing to sell, at any given price.
What is the law of supply?
All other things equal (ceteris paribus), quantity supplied (QS) increases when the price increases and vice-versa
What will a change in price do to supply?
It will cause a movement along the supply curve and a change in the quantity supplied (Qs).
What are the 6 variables that will cause the supply curve to shift?
- 1. Change in input prices (labour, supplies, etc.)
- * If input prices increase, costs of production increase and producers will supply less, or vice-versa.
- 2. Changes in technology
- * Increases productivity, lowering costs so producers will supply more.
- 3. Change in number of suppliers
- * More suppliers of the same good will increase overall supply
- 4. Changes in expectations about future prices
- * If prices are expected to increase in the future, suppliers will decrease their supply today and wait to sell their goods in the future at a higher price, or vice-versa
- 5. Changes in current events.
- * Bad weather, natural disasters or wars will decrease supply of many goods; particularly agricultural goods.
- 6. Changes in the price of a complement or substitute in production
- *substitute a producer can use the same set of inputs to produce two different goods, so when the price of one goes up, the supply of the other goes down.
- * complement a by-product of production. When the price of one goes up, the supply of the other also goes up.
What is the difference between a substitute and a complement in production?
A substitute in production
is when a producer can use the same set of inputs to produce two different goods.
- ex. A farmer can produce carrots or beets on the same land.
- If the price of carrots increases, the supply of beets will decrease (because the farmer can get more money by growing carrots)
A complement in production
is a by-product of production.
- ex. You get milk, and you can make butter. You grow beet roots, and you also get beet greens
- *If the price of beet leaves increases, the supply of beet roots will increase (because the farmer can get more money for the leaves, and the roots come with it).
What would happen if the market was not in equalibrium due:
1. A shortage (Qd > Qs)
2. A surplus (Qs > Qd)
1. If there was a shortage in the market, the price would increase as there is an opportunity for suppliers to make more money by raising the price.
2. If there was a surplus in the market, the price would decrease as there would be an opportunity for suppliers to make more money by lowering the price.
Which slope is steeper, 0.1x or 0.4x ?
A slope of 0 is a flat horizontal line, so a slope of 0.1 is flatter than a slope of 0.4.
* keep this in mind when drawing graphs
When drawing a graph where both the supply and demand curves shift, what do we need to do and why?
Draw two graphs. One with the shift in demand larger than the shift in supply, and vice-versa. Because, depending on the size of the shifts, the quantity or price could either increase or decrease.
If demand decreases and supply increases, what will happen to the price and quantity?
The price will decrease for sure, but the change in quantity will be ambiguous
* depends on the relative sizes of the shifts of D and S
If both demand and supply decrease what will happen to quantity and price?
Quantity will decrease for sure, but the change in price is ambiguous.
* depends on the relative sizes of the shifts of D and S
What does the demand curve for an addictive drug or a necessity look like?
It is very steep, because as supply decreases and prices increase, the quantity will supplied will not go down much because people will just pay more.