Macro Economics Chapters 3 and 4
Terms in this set (41)
the ability to produce a good using fewer inputs than another producer
the ability to produce a good at a lower opportunity cost than another producer
-its impossible for one person to have a comparative advantage in producing both goods.
what must happen in order for both parties to gain from trade?
the price at which they trade must lie between the two opportunity costs
goods produced abroad and sold domestically
goods produced domestically and sold abroad
a group of buyers and sellers of a particular good or service.
-buyers determine the demand
-sellers determine the supply
a market in which there are so many buyers and so many sellers that each has a negligible impact on the market price.
-sellers have limited control over price because they are selling similar products
perfectly competitive market
1. the goods offered for sale are all exactly the same
2. the buyers and sellers are so numerous that no single buyer or seller has any influence over the market price.
buyers and sellers in a perfectly competitive market must accept the price the market determines.
-at the market price, buyers can buy all they want and sellers can sell all they want.
market in which there is only one sellers and this seller sets the price.
the amount of a good that buyers are willing and able to purchase
law of demand
other things equal, then the price of a good rises, the quantity demanded of that good falls, and when the price of a good falls, the quantity demanded of that good rises.
a table that shows the relationship between the price of a good and the quantity demanded, holding constant everything else that influences how much of the good consumers want to buy.
a graph of the relationship between the price of a good and the quantity demanded.
the sum of all the individual demands for a particular good or service
total quantity demanded at any price
to find this, you add all of the individual quantities, which are found on the horizontal axis of the individual demand curves.
demand curve shifts
if something happens to alter the quantity demanded at any given price, the demand curve shifts
increase in demand
any change that increases the quantity demanded at every price is called an increase in demand and shifts the demand curve to the right.
decrease in demand
any change that decreases the quantity demanded at every price is called a decrease in demand and shifts the demand curve to the left.
variables that shift the demand curve
-prices of related goods
-number of buyers
a good for which demand falls when income falls
if demand for a good rises when income falls
ex. bus rides
when a fall in the price of one good reduces the demand for another good, these goods are substitutes.
-often pairs of goods that are used in place of each other
when the fall in the price of one goods raises demand for another good, these goods are compliments.
-often pairs of goods that are used together
number of buyers
as the number of buyers increases, the quantity demanded in the market could be higher at every price and the market demand would increase
the amount of a good that sellers are willing and able to sell
-when price is high, quantity supplied is large
-when price is low, quantity supplied is low
law of supply
other things equal, when the price of a good rises, the quantity supplied of the good also rises, and when the price falls, the quantity supplied falls as well.
a table that shows the relationship between the price of a good and the quantity suppled, holding constant everything else that influences how much producers of the good want to sell.
a graph of the relationship between the price of a good and the quantity supplied
market supply curve
sum of the individual supply curves horizontally
-shows how the total quantity supplied varies as the price of the good varies, holding constant all the other factors beyond price that influence producers' decisions about how much to sell.
increase in supply
any change that raises quantity supplied at every point shifts the supply curve to the right.
decrease in supply
any change that reduces the quantity supplied at every price shifts to the left.
variables that shift the supply curve
-inputs- if the price of inputs rise, then producing is less profitable.
-technology- advance in technology raises supply
-number of sellers
a situation in which the market price has reached the level at which quantity supplies equals quantity demanded.
the price that balances quantity supplied and quantity demanded
*also know as market-clearing price
the quantity supplied and quantity demanded at the equilibrium price
a situation in which quantity supplied is greater than quantity demanded
a situation in which quantity demanded is greater than quantity supplied
law of supply and demand
the price of any good adjusts to bring the quantity supplied and quantity demanded for that good into balance.
three steps for analyzing changes in equilibrium
1. decide whether the event shifts the supply or demand curve
2. decide in which direction the curve shifts
3. use the supply and demand diagram to see how the shift changes the equilibrium price and quantity
supply vs quantity supplied
supply refers to the position of the demand curve where as quantity supplied refers to the amount suppliers wish to sell.