Econ 302
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- A demand curve can best be descriped as:
- A graph that shows the relationship between price and quantity demanded.
- You are given the demand function QD = 1000-20P+10Ps-10Pc+6Y. You are also given the supply function QS= -180+40P-40C. Suppose Ps=11, Pc= 8, Y= 25 and C=20. What is the equilbrium price and quantity?
- Price is 36 and quantity is 460
- Suppose Ps changed from 11 to 5. What would the new equilibrium price and quantity be?
- Price is 35 and quantity is 420.
- Which of the following things does NOT affect quantity supplied? a) the price of a good b) the cost of production C) weather d) none of the above e) all of the above
- none of the above
- What information does a consumer's budget constraint for two goods take into account?
- Price of good X, Quantity demanded, income of the consumer
- When quantity demanded is greater than quantity supplied, it is known as having _____, whereas when quantity demanded is less than quantity supplied, it is known as having______
- a shortage and excess demand; a surplus and excess supply
- Which one of these things would cause a shift in the demand curve? a) a change in income b) a change in price of a complement c) a change in prefrences d) all of the above e) none of the above
- all of the above
- Which one of these would NOT cause a shift in the supply curve? a) change in income b) natural disasters c) change in the cost of production d) government policies
- change in income
- An increase in demand for a product would lead to:
- an increse in the equilibrium price and quantity
- If the price of a good ___, the the demand of the complment___
- increases; decreases
- If the ____ of a good decreases, then the ___ of the substitute increases
- price; supply
- An increase in supply would lead to:
- a decrease in equilibrium price and an increase in equilibrium quantity
- A decrease in demand would lead to:
- A decrease in equilibrium price and quantity
- T/F? When the price elasticity of demand is equal to infinity the price elasticity of demand is said to be perfectly elastic:
- True
- The more substitutes available, the more elasticity decreases. (T/F)
- False
- The smaller the proportion of your income that you spend to a good, the more inelastic the good is. (T/F)?
- True
- Microeconomics
- The study of the allocation if scarce resources (land, labor, and capital) Study individual agents such as consumers, firms, government Price theory is another name for economics because prices drive the answers to the three main questions of economics
- 3 Main questions of economics:
- 1) What to produce- choices must be made due to the fact that there are scarce resources 2) How to produce- decide what production methods are the best to use 3) For whom to produce- options include sharing equally, giving everything to one person, giving to only people with certain amount of buying power (In a free market economy, prices determine the answer to the above questions
- Quantity Demanded
- the amount of a good that a consumer will buy during a given period of time at a given price
- Demand Schedule
- A table showing the different quantities demanded at different prices -price and Qd are inversely related, ceteris paribus
- Demand Curve
- a graph of a demand schedule -negatively sloped
- Law of Demand
- there is a negative reliability between Price and Quantity, ceteris paribus
- Change in Demand
- A shift of the demand curve. A change in demand occurs when there is a change in something other than price.
- Causes of Change in Demand:
- 1) Change in Preferences 2) Consumer income -normal goods= an increase in income causes rise in demand -inferior= rise in income causes decrease in demand ( ramon noodles, store brand cereals) 3) Change in price of related goods -substitutes -complements 4) expectations(Prices and income) 5) the number of consumers in market 6) government policy (tax on consumers will decrease the demand for a product)
- Change in Quantity Demanded
- occurs because of the change in the price of a good and is represented by a movement along a demand curve.
- Normal goods
- rise in income causes rise in demand
- Inferior goods
- rise in income causes a decrease in demand
- Substitutes
- two goods are substitutes if an increase in price of one causes an increase in demand for the other good, and vice versa (ex: chicken + beef)
- Complements
- two goods are complments if an increase in price of one good causes a decrease in demand for the other good, and vice versa. ex: guitars + guitar strings
- Supply demanded (Quantity Supplied)
- The amount of a good or service that a firm would produce and offer for sale at a given price during a given period of time.
- Supply Schedule
- a table showing the different quantities supplied at different prices
- Law of Supply
- Price and Quantity are positively related. (Directly)
- Supply Curve
- A graph of the supply schedule
- Change in Supply
- A shift of the supply curve. It is caused by a change in something other than price.
- Change in Quantity Supplied
- represented by a movement along a supply curve. caused by a change in price.
- Causes of Change in supply
- 1) Change in the cost of production - occur b/c of change in price of inputs - occur b/c of a change in technology - an increase in the cost of production causes a decrease in supply 2) Change in the # of firms in the market 3) Tax on suppliers - increasing a tax on supplies will decrease supply 4) Weather, wars, natural disasters
- Equilibrium (Definition)
- a situation where there is no tendency for change
- Equilibrium Price
- the price where QD =QS
- Equilirbium Alternatives 1) QD> QS
- -known as a shortage or excess demand - not enough products to go around - pressure for price to rise ex: Penn State/Ohio State football game -shortage of football tickets -tendency for price to rise
-
Equilibrium alternative
2) QD
- - this is known as a surplus or excess supply -too much supply that isn't being purchased -tendency for price to fall
- Equilibrium alternative 3) QD = QS
- there is no tendency for price to change
- Increase in Demand
- -price increases - quantity increases - quantity supplied increases - doesn't break law of demand because all things are not equal (circumstances changed)
- Increase in supply
- -price decreases - quantity increases - quantity demanded increases
- Decrease in supply
- -price increases - quantity demanded decreases
- Simultaneous shifts in supply and demand
- 1) Always analyze shifts separately 2) Ex: Fed increases supply of money (right shift of supply) while Bush wants to send people rebates (right shift of demand) 3) Demand and supply both increase - definitely an increase in quantity - price is indeterminate because more information is needed 4) Demand decreases and supply increases - price definitely decreases -quantity is indeterminate because more information is needed
- Important points to remember in Price elasticity of demand
- 1) elasticity changes as we move along a linear demand curve 2) as long as the law of demand is met (demand curve has a negative slope) elasticity will always be negative 3) since elasticity is always negative yet it is easier to use positive numbers many people always use the absolute value of elasticity 4) even though -2 is a smaller number than -1, when talking about elasticity the -2 is going to have a bigger effect which is easier to show by taking the absolute value
- Perfectly Inelastic
- 1) I e I = 0 2) results in a vertical line 3) examples include products like insulin that you need no more and no less of 4) when price changes, consumers will still buy the same amount 5) occurs at y-intercept of demand curve -vertical demand curve
- Inelastic
- 1) 0< I e I < 1 2) when price changes, quantity changes, but not by a lot 3) therefore quantity change is less than price change 4) ex: petroleum 5) occurs from x-intercept to midpoint of demand curve
- Unitary elastic
- 1) I e I = 1 2) quantity change is equal to price change 3) occurs at midpoint of demand curve
- Elastic
- 1) 1 < I e I < infinity 2) quantity change is greater than price change 3) occurs from midpoint to y-intercept of demand curve
- Perfectly Elastic
- 1) I e I = infinity 2) results in a horizontal line 3) occurs at x-intercept of demand curve
- Total Revenue
- = total expenditure = P x Q - this only occurs in the absence of any government intervention such as taxes
- If demand is inelastic ( relevant to revenue)
- 1) if price rises, total revenue increases 2) change in price is more dramatic than change in quantity 3) the more inelastic the demand for a good is, the more the tax will be paid by the consumers
- If demand is elastic( relevant to revenue)
- 1) if price rises, total revenue decreases 2) change in quantity is more dramatic than change in price - total revenue is maximized where price elasticity of demand is equal to 1. (unitary elastic)
- Determining when a good is elastic.
- -availability of substitues, the more = substitutes there are for a good the more elastic the demand for the good. - Proportion of the consumers budget that is spent on good. The more higher the proportion of a consumers budget spent on a good, the more elastic the demand. - length of time consumers have to adjust to a price change. The longer consumers have to adjust to a price change, the more elastic the demand.
- Cross- price elasticity of demand (positive or negative)
- % change demand A/ % change price B. -if this is < 0, then A and B are complements - >0 then A and B are substitutes - = 0 unrelated
- Income elasticity of demand
- % change in demand/ % change in income -positive = normal good >0 -negative = inferior good <0
- Excise tax
- a certain amount, t, is taxed per unit of the good purchased
- Legal incidence of Tax
- When the law is written, they specify who the tax will be imposed upon (consumers or producers0
- Economic Incidence of a Tax
- 1. Who actually ends up paying the tax 2. Ex: sometimes, even though the government may impose a tax on a particular company, that company can still transfer that cost to the consumers through the price that they charge. 3. Excise Tax: tax on particular product: ex: gas 4. Per-unit Excise Tax
- Per unit excise tax
- a certain amount (t) is taxed per unit of the good sold (ex $1 per pack of cigarette) - levied on the consumers of a product will shift the demand for that products down by an amount exactly = to the tax
- Determinants of Elasticity
- 1- time frame 2- proportion 3- Availability of substitutes
- Time Frame(determinants of elasticity)
- -The longer consumers have to adjust to price change, the more elastic the demand will be because there is more time to find alternative options and vice versa. --Ex: if gas prices increase drastically all of the sudden, you do not have many alternative options because you have to be places. However, after a few months you may adopt to this by buying a hybrid car.
- Proportion of Income spent on the good (Determinant of elasticity)
- -The larger the proportion of income spent, the more elastic demand will be and vice versa
- Availability of Substitutes(Determinants of elasticity)
- -The more substitutes there are for a good, the more elastic the demand.
- Consumer Theory
- - a consumer will choose the best bundle of goods that he or she can afford. --no one will purchase something to intentionally make yourself worse off - Assume there are two goods, x and y - Symbols X: quantity of good x Y: Quantity of good y Px: Price of good x Py: price of good y M: amount of money the consumer has to spend
- Bundle (definition)
- a collection of goods
- Budget Set
- the set of all bundles that a consumer can afford
- Budget Constraints
- 1. Assume prices are given and constant 2. Any point in the graph area represents a bundle of goods 3. Budget constraint equation: Y= M/Py-(Px/Py x X) 4. Can afford anything within the budget set 5. Slope of budget constraint: -px/py
- Marginal Rate of Transformation
- The amount of good y that a consumer must give up in order to obtain one extra unit of good x. More generally, it is the rate at which a consumer can trade one good for another. Determined by the prices of the goods. Value MRT= -PX/PY
- Symbols Preferences
- - a> b: a is prefered to b - b>a: b is prefered to a - a~b: the consumer is indifferent between a and B - a >/b: a is atleast as good as b
- 3 Assumptions
- 1. Completeness: for any two bundles,a and b, that you can imagine a is perferred to be, b is prefered to A, or a and b are indifferent 2. Transivity: for any 3 bundles, A B and C, if a is preferred to B and B is preferred to C then A is preferred to C 3. More is better: for any 2 bundles A and B, if bundle A has at least as much of all goods as bundle B, and bundle A has strictly more of some good than bundle b, then A is preferred to B
- Marginal Utility
- The extra utility a consumer gets from consuming an extra unit of good X.
- Marginal Rate of Submission
- the rate at which a consumer is willing to trade one good for another. It is equal to the slope of the consumers indifferenece curve. Put another way, it is the amount of the good on the vertical axis that a consumer is willing to give up to obtain an extra unit of the good on the horizontal axis. The vaule that it takes is equal to Mux/Muy