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Flashcards in Microeconomics Deck (10)
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1

Markets

A place where buyers and sellers meet to engage in mutual trade where prices are set by the interaction of demand and supply.

2

Demand

The willingness and ability of consumers to purchase a good or service at a given price in a given time period.

3

Law of demand

A negative casual relationship showing the state that as the price of a product falls, the quantity demanded of the product will usually increase, ceteris paribus.

3

Why is there an increase in demand?

1. Income effect: falling prices of a product allows consumers to increase their "real income" which reflects the amount that their incomes will buy.
2. Substitution effect: falling prices of a product will be relatively more attractive as they substitute it for products previously purchased.

4

What are non-price determinants of demand?

1. Income
- normal goods: essential goods; as income rises, the demand for these products will also rise.
- inferior goods: not as good as normal goods; as income rises, the demand for these products will decrease as consumers buys higher priced substitutes instead.
2. The price of other products
- substitutes: change in A will cause a change in B as the price of A falling will lead to a higher demand of it, therefore resulting a fall of demand for B.
- complements: products purchased together. A change in C will cause a change in D as the price of C falling will lead to a higher demand of it as well as an increasing demand for D.
- unrelated goods: change in price of one product will have no effect upon the demand for the other.
3. Tastes/Preferences
Market favors alter the demand of a product
4. Other factors
- size of population: growth = increasing demand
- change in age structure of population: alter the change in demand for certain products
- change in income distribution: if the gap shortens, there may be an increase for necessity goods
- seasonal changes: change of pattern of demand

5

Distinction between movement along and a shift of the demand curve.

A change of the price of the good itself leads to a movement along the existing demand curve.
A change in any of the other determinants of demand will always lead to a shift of the demand curve to either the left or the right.

6

Supply

The willingness and ability of producers to produce a good or service at a given price in a given time period.

7

Law of supply

A positive casual relationship showing the state that as the price of a product rises, the quantity supplied of the product will usually increase, ceteris paribus.

8

Change in the quantity supplied.

A change in the price of the product itself will lead to a change in the quantity supplied (ie. a movement along the existing supply curve)
This occurs because at higher prices there will be more potential profits to be made so the producer will increase output.

9

What are non-price determinants of supply?

1. Costs of factors of production
2. Price of other products the producer can produce instead of the existing product
- If the price of A rises when producing A and B costs the same, producers will choose to produce A instead of B as they gain more profit
3. State of technology
4. Expectations
- vary among assumptions about product prices in the future
5. Government intervention
- indirect taxes: taxes added on goods and services that add up to the price of a product.
- subsidies: payments made to firms that will produce certain products in support of reducing their costs.