Unit 2 - Supply and Demand Guide

PES

measures how sensitive are sellers to price changes on goods.

Substitution effect

as the price of a good increases, consumers substitute the good with another that is cheaper.

License

gives an owner the right to supply a good /service.

Deadweight loss

transactions that should occur, but dont because of government intervention (calculate the area= triangle formula, ½ (base x height)

Quota

upper limit of a quantity that can be bought or sold (known as quantity control)

Subsidies

are the opposite of taxes and help reduce price per unit.

Inferior good

increase in demand when consumers income decreases

Equilibrium

occurs when no one is better off doing something else.

Substitutes

good /service that can be used in place of another, when price of one increases, consumers will buy more of the other (ex.

Complements

goods /services that are consumed together (ex.

inverse impact

The cost of production (land, labor, capital) has a(n) ________ on the supply.

large portion

Flat, quantity is sensitive to price change, substitutes, luxury items, ________ of income, not needed immediately.

Elasticity

how much the Q is affected by P.

Tariffs

tax placed on a good that is imported or exported.

Quota rent

difference between demand price and supply price.

Negative

= compliments (inferior good)

positive

= substitutes (normal good)

Shortage

Qs <Qd, price is lower than equilibrium.

Double shift

either price or quantity will be unknown.

Taxes

are added up to the unit cost of production, thus making it more expensive.

Elastic demand

means that the goods are subject to be affected by a change in price.

Inelastic demand

TR correlates direct with price.

Normal good

increase in demand when consumers income increases (ex.

market supply

The ________ shows the quantity a supplier is willing and able to offer at various prices at a given time.

Elastic demand

TR correlates inversely with price.

Inelastic demand

means that goods are not subject to be affected by a change in price.

Demand

the quantity which a consumer/buyer are willing and able to buy at different prices

Law of Demand

As price increases, demand decreases, and as price decreases, demand increases

Substitutes

good/service that can be used in place of another, when price of one increases, consumers will buy more of the other (ex

Substitution effect

as the price of a good increases, consumers substitute the good with another that is cheaper

Complements

goods/services that are consumed together (ex

Income effect

as income increases, people will buy more of normal goods, and less of inferior goods

Normal good

increase in demand when consumers income increases (ex

Inferior good

increase in demand when consumers income decreases (ex

Diminishing marginal utility

As more units of a product are consumed, the satisfaction/utility it provides tends to decline

Supply

different quantities of goods/services which sellers are willing and able to produce at a given price

Law of supply

as price increases, quantity supplied also increases, this is a direct relation

Inelastic demand

TR correlates direct with price

Elasticity

how much the Q is affected by P

PES

measures how sensitive are sellers to price changes on goods

Inelastic

unable to respond to price change

Equilibrium

occurs when no one is better off doing something else

Producer surplus

actual price -price the producer is willing to sell for

Demand increase

price and quantity increase

Demand decrease

price and quantity decrease

Supply increase

price decreases, quantity increases

Supply decrease

price increases, quantity decreases

Double shift

either price or quantity will be unknown

Deadweight loss (DWL)

transactions that should occur, but dont because of government intervention (calculate the area = triangle formula, ½(base x height)

Price floor

minimum price a supplier can charge, price is set above equilibrium (causes shortage)

Price ceiling

maximum price a supplier can charge, price is set below equilibrium (causes surplus)

Quota

upper limit of a quantity that can be bought or sold (known as quantity control)

License

gives an owner the right to supply a good/service

Demand price

the price at which consumers will demand that quantity

Supply price

the price at which producers will supply that quantity

Quota rent

difference between demand price and supply price

Tariffs

tax placed on a good that is imported or exported

Import quota

restriction on the quantity of a good that can be imported