Flashcards: Supply, Demand and Market Equilibrium — 34 cards

What is the formula of the inverse demand function?

The inverse demand function is $P=a+bQ$.

What are the signs of parameters a and b in $P=a+bQ$?

Parameter $a$ is positive and $b$ is negative.

What does a demand-curve shift change in the inverse demand function?

It changes the intercept $a$.

Why does a change in intercept a represent a demand-curve shift?

Because when $Q=0$, $P=a$.

What does a higher intercept a do to the demand curve's position?

It shifts the curve farther to the right.

What does a lower intercept a do to the demand curve's position?

It shifts the curve farther to the left.

What is willingness to accept in production?

The minimum price a firm accepts to produce a good or service.

What happens to quantity supplied when product price increases?

Quantity supplied increases ceteris paribus.

Why is the supply curve upward-sloping?

Because quantity supplied rises as price rises.

What defines an individual firm's supply?

The profit-maximizing quantity produced by that firm.

How is market supply determined?

By summing all individual firms' supplies.

Why is the short-run supply curve generally upward-sloping?

Because firms cannot adjust all production capacities quickly.

What is the inverse supply function formula?

The inverse supply function is $P=c+dQ$ with $c>0$ and $d>0$.

How does an increase in production-factor costs affect supply?

It lowers profit and shifts the supply curve to the left.

How does a decrease in production-factor costs affect supply?

It raises profit and shifts the supply curve to the right.

What effect does technological progress have on production costs?

It lowers production costs by allowing fewer inputs for the same product.

How does technological progress shift the supply curve?

It shifts the supply curve to the right.

What do refiners do if they anticipate higher future gasoline prices?

They store part of today's production, reducing current quantity supplied.

How does storing production in anticipation of higher prices affect current supply?

It shifts the current supply curve to the left.

What is market equilibrium in economics?

The price where quantity supplied equals quantity demanded.

What does the equilibrium pair consist of?

Equilibrium quantity Qeq and equilibrium price Peq.

What does partial equilibrium analyze?

The market for one product.

What does general equilibrium analyze?

All markets together.

What is consumer surplus in market exchanges?

The benefit to consumers paying less than their willingness to pay.

What defines producer surplus in market exchanges?

The benefit to producers receiving more than their willingness to accept.

What formula expresses total surplus in terms of consumer and producer surplus?

$ST=SC+SP$ where SC is consumer surplus and SP is producer surplus.

How does a rightward demand shift affect equilibrium price and quantity?

It raises both equilibrium price and quantity, all else equal.

What market shocks occur in the beer-market example?

A heatwave causes a positive demand shock and drought causes a negative supply shock.

What happens to equilibrium price and quantity when positive demand and negative supply shocks occur together?

Price increases, but quantity effect is indeterminate without shock magnitudes.

How does the relative size of demand and supply shocks affect equilibrium quantity?

Quantity rises if demand shock is larger, falls if supply shock is larger, or is indeterminate if equal.

What is a price ceiling?

The maximum price a producer may legally charge for a product.

What happens if a price ceiling is above equilibrium price?

It is non-binding and has no effect on the market.

Why does a price ceiling below equilibrium price affect the market?

Because it is binding and changes quantities demanded and supplied.

What is a price floor?

The minimum price below which a product may not legally be sold.