BackMicroeconomics: Supply and Demand
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Terms in this set (20)
The law of demand states that, ceteris paribus, as the price of a good increases, the quantity demanded decreases, and vice versa.
The law of supply states that, ceteris paribus, as the price of a good increases, the quantity supplied increases, and vice versa.
The equilibrium price is the price at which quantity demanded equals quantity supplied.
Changes in factors like income, tastes, prices of related goods, expectations, and number of buyers cause the demand curve to shift.
Changes in input prices, technology, expectations, number of sellers, and taxes or subsidies cause the supply curve to shift.
A price ceiling is a legal maximum price set below equilibrium, causing shortages.
A price floor is a legal minimum price set above equilibrium, causing surpluses.
A surplus occurs when quantity supplied exceeds quantity demanded at a given price above equilibrium.
A shortage occurs when quantity demanded exceeds quantity supplied at a given price below equilibrium.
An increase in demand raises both equilibrium price and quantity.
An increase in supply lowers equilibrium price and raises equilibrium quantity.
Price elasticity of demand measures how much quantity demanded responds to a change in price.
Elastic demand means quantity demanded changes by a larger percentage than price changes.
Inelastic demand means quantity demanded changes by a smaller percentage than price changes.
Consumer surplus is the difference between what consumers are willing to pay and what they actually pay.
Producer surplus is the difference between the price producers receive and their minimum acceptable price.
A tax on suppliers shifts the supply curve left, increasing price and reducing quantity sold.
A subsidy shifts the supply curve right, lowering price and increasing quantity sold.
A movement along a curve is caused by price changes; a shift is caused by changes in other factors.
Expectations about future prices can shift current demand or supply curves.