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Supply and Demand in Macroeconomics

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Terms in this set (20)

  • What defines a competitive market?
    A competitive market has many buyers and sellers, each with a negligible effect on price, and all goods are exactly the same.
  • What is the law of demand?
    The quantity demanded of a good falls when the price rises, other things equal.
  • Why do demand curves slope downward?
    Because as price falls, buyers purchase the good for lower-value uses, increasing quantity demanded.
  • Name three non-price determinants that shift the demand curve.
    Income, prices of related goods (substitutes and complements), and tastes or expectations.
  • How does an increase in the number of buyers affect the demand curve?
    It shifts the demand curve to the right, increasing quantity demanded at each price.
  • What is the law of supply?
    The quantity supplied of a good rises when the price rises, other things equal.
  • Why do supply curves slope upward?
    Because higher prices make it profitable for higher-cost suppliers to enter the market, increasing quantity supplied.
  • List some non-price determinants that shift the supply curve.
    Input prices, technology, number of sellers, and expectations.
  • What happens to supply if input prices fall?
    The supply curve shifts right, increasing quantity supplied at each price.
  • Define market equilibrium.
    The price at which quantity supplied equals quantity demanded.
  • What is a surplus in a market?
    When quantity supplied is greater than quantity demanded at a given price.
  • How do sellers respond to a surplus?
    They cut prices, causing quantity demanded to rise and quantity supplied to fall, reducing the surplus.
  • What is a shortage in a market?
    When quantity demanded is greater than quantity supplied at a given price.
  • How do sellers respond to a shortage?
    They raise prices, causing quantity demanded to fall and quantity supplied to rise, reducing the shortage.
  • What are the three steps to analyze changes in equilibrium?
    1. Decide which curve(s) shift. 2. Decide direction of shift. 3. Use supply-demand diagram to find new equilibrium price and quantity.
  • How does an increase in gas prices affect demand for electric cars?
    Demand for electric cars increases (demand curve shifts right) because they become more attractive relative to gas cars.
  • How does a technological advance in production affect supply?
    Supply increases (supply curve shifts right) because production costs fall, making it more profitable to produce at any price.
  • What happens when both supply and demand increase?
    Quantity rises, but the effect on price is ambiguous; price rises if demand increases more than supply, and falls if supply increases more.
  • What is a substitute good?
    A good where an increase in the price of one causes an increase in demand for the other.
  • What is a complement good?
    A good where an increase in the price of one causes a decrease in demand for the other.