About this Flash Card Set
16 Cards
by james_okafor
A focused set on how supply and demand set prices in a market, with the key terms and shifters explained through everyday examples. Perfect for building microeconomics intuition.
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What is the law of demand?
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All else equal, as the price of a good rises, the quantity people want to buy falls, and as the price falls, the quantity demanded rises. Buyers respond to price.
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What is the law of supply?
Back
All else equal, as the price of a good rises, producers are willing to supply more of it, and as the price falls, they supply less. Higher prices reward more production.
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What is the equilibrium price?
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The price at which the quantity buyers want to buy exactly equals the quantity sellers want to sell. At this point the market is balanced with no shortage or surplus.
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What is a surplus?
Back
A situation where the quantity supplied is greater than the quantity demanded, usually because the price is too high. Sellers are left with unsold goods and tend to lower prices.
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What is a shortage?
Back
A situation where the quantity demanded is greater than the quantity supplied, usually because the price is too low. Buyers compete for scarce goods and prices tend to rise.
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What are substitute goods?
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Goods that can be used in place of one another, so a price rise in one increases demand for the other. Example: if tea gets more expensive, people may buy more coffee.
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What are complementary goods?
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Goods that are used together, so a price rise in one lowers demand for the other. Example: if printers get more expensive, demand for ink cartridges tends to fall.
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What is the difference between elastic and inelastic demand?
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Elastic demand changes a lot when the price changes, common for non-essential goods. Inelastic demand changes little when the price changes, common for necessities like gasoline or medicine.
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What is the difference between normal and inferior goods?
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For normal goods, demand rises as people's income rises, like restaurant meals. For inferior goods, demand falls as income rises, like instant noodles when people can afford more.
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What factors can shift the demand curve?
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Changes in consumer income, tastes and preferences, the prices of related goods, the number of buyers, and expectations about the future can all increase or decrease demand.
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What factors can shift the supply curve?
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Changes in production costs, technology, the prices of inputs, the number of sellers, taxes or subsidies, and expectations can all increase or decrease supply.
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What is a price ceiling?
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A government-set maximum legal price for a good, placed below the equilibrium price. Example: rent control. It can help buyers but often causes shortages.
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What is a price floor?
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A government-set minimum legal price for a good, placed above the equilibrium price. Example: a minimum wage. It can help sellers or workers but may create surpluses.
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What is competition in a market?
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The rivalry among sellers trying to attract buyers, and among buyers seeking goods. More competition tends to push prices down and improve quality and choice.
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What is the 'invisible hand'?
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A phrase from economist Adam Smith describing how individuals pursuing their own self-interest in a free market can unintentionally benefit society as a whole through supply and demand.
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Why do prices rise when demand exceeds supply?
Back
When more people want a good than there is available, buyers compete for the limited quantity, and sellers can charge more. Rising prices signal producers to supply more and some buyers to buy less, moving the market toward balance.
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