economics supply and demand

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Cross Price Elasticity

% change in demand of Coke/ % change in price of pepsi

factors that cause a shift: other goods

- Substitutes in Production: goods that are CO-PRODUCED - Complements in production: goods that are the BY-PRODUCTS in production - prices change in other products produced by firms - the same resources can be used to produce different goods

if the decrease in demand is greater than the increase in supply, equilibrium quantity will _____

- quantity will decrease

Consequences of Price Ceilings: Inefficient allocation of resources

- when resources aren't put where they should be in the market place (people want stuff but don't get it; houses taken by people not in poverty)

consequences of price ceilings: inefficiently low quality

- with rent control there is no incentive to provide better quality because you will get the same amount of money for the product

List of factors that cause a shift

1. # of consumers 2. tastes and preferences 3. expectations of future prices 4. income (normal and inferior goods) 5. related goods (substitutes and complements)

Factors that cause a shift: Technology

1. All of the methods that people can use to turn inputs into useful goods and services - reduces per unit costs - increases profitability

Factors that cause a shift: subsidies and taxes

1. SUBSIDIES reduce the per unit cost and increase of quantity supplied at each possible price 2. TAXES raise the per unit cost and decrease the quantity supplied at each possible price

if supply increases and demand increases

1. equilibrium quantity will INCREASE 2. equilibrium price will be AMBIGUOUS

if supply decreases and demand increases

1. equilibrium quantity will be AMBIGUOUS 2. equilibrium price will INCREASE

if supply increases and demand decreases

1. equilibrium quantity will be be AMBIGUOUS 2. equilibrium price will DECREASE

Factors that cause a shift: expectations of future price

1. expect prices to go up later, BUY NOW (shift the right) 2. expect prices to go down later, BUY LATER (decreased demand now); shift to the left

factors that cause a shift: tastes and preference

1. fads 2. when taste changes in favor, the curve shifts to the right 3. when taste changes against, curve shifts to the left

factors that cause a shift: number of consumers

1. more buyers= greater demand= to the right 2. fewer buyers= less demand= to the left CAUSED BY demographic changes or in the availability in more markets

factors that cause a shift: number of sellers

1. more sellers= greater supply 2. fewer sellers= lower supply

movements along vs shifts of the supply and demand curve

1. movement along the curve is caused by PRICE 2. shifts of the curve involve change in DEMAND AT ALL POSSIBLE PRICES

factors that cause a shift: resources (price of inputs)

1. resources are necessary to produce goods 2. increases in the price of resources raises the per unit cost, which LOWERS THE SUPPLY 3. decreases in the price of resources lowers the per unit cost, which INCREASES THE SUPPLY

factors that cause a shift: expectations of future prices

1. sellers will REDUCE the SUPPLY now if they expect a HIGHER price in the future 2. sellers will INCREASE the SUPPLY now if they expect a LOWER PRICE IN THE FUTURE

Factors that Cause a Shift

1. subsidies and taxes 2. technology 3. Number of Sellers 4. other goods (substitutes in production and complements in production) 5. expectation of future prices 6. resources (prices of inputs)

if supply decreases and demand decreases

1. the Equilibrium quantity will DECREASE 2. the equilibrium price will be AMBIGUOUS

The Law of Demand

1. when prices increases, the quantity demanded decreases 2. when the price decreases, the quantity demanded increases 3. there is an INVERSE relationship between price and quantity demanded 4. price on the y axis, demand on the x axis. slope down from high price to high demand

The Law of Supply

1. when the price increases, the quantity supplied increases 2. when the price decreased, the quantity supplied decreases 3. there is a positive or direct relationship between the price and quantity supplied THE GRAPH: - price on y axis - supplied on x axis - from low price to high price like an arrow up

Determinants of Elasticity:

1.Time Horizon: short time= inelastic but in long run= elastic 2. Availability of Substitutes= elastic (buy other) 3. necessity vs luxury 4. % share of budget, change habits

demand

A SCHEDULE OR CURVE that shows the various amounts of a proudct that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time, CETTERIS PARIBUS

Polar Cases of Elasticity: Perfectly Elastic

Perfectly Elastic= stop buying at one point= horizontal line

Polar Cases of Elasticity: Perfectly Inelastic

Perfectly inelastic= no response= vertical line

Inelastic Demand

When quantity demanded is not very responsive to the price, the % change in quantity demanded will be less than the % change in price. the price elasticity will be LESS than 1 in absolute value

income effect

a price increase cause consumers to feel poorer and a price decrease causes them to feel richer

inferior goods

a rise in income decreases the demand for the good

normal goods

a rise in income increases the demand for the good (Disney world, nice restaurant)

Supply

a schedule or curve that shows the various amounts of a product that producers are willing and able to supply at each of a series of possible prices during a specified period of time

when two goods have a negative cross price elasticity , they are

complements

black markets

consequences of price ceilings

illegal activity

consequences of price floors

complements

consumed jointly; directly related; price rise in one good leads to a decrease demand in the other good

Substitution Effect

consumers switch away froma good whose price has risen towards goods that do not experience a price increase

if the decrease in in demand is greater than the decrease in supply, equilibrium price will ____

decrease

if the decrease in supply is greater than the increase in demand, equilibrium quantity will ____

decrease

if the increase in supply is greater than the increase in demand, equilibrium price will

decrease

If the price ceiling is above the equilibrium point, it______

does nothing

When both supply and demand change at the same time, we should be able to predict changes to either:

equilibrium price or equilibrium quantity

Elastic Demand

if the quantity demanded is responsive in price, % change in demand will be greater than the % change in price. he price elasticity will be GREATER than 1 in absolute value

Price elasticity of demand

is a measure of responsiveness of the quantity demanded to a change in price

consequences of price floors: wasted resources

not go on market; won't get it to people; wasted

consequences of price ceilings: wasted resources

people who are willing to pay higher rent but can't get an apartment; shortage of apartments

consequences of price floors: low quantity of buyers

people won't put the thing on the market because there won't be buyers

basic measure is

percent change in quantity demanded divided by percent change in price - abs value

consequences of price floors: inefficient allocation of sales among sellers:

price raised, sellers sell it ; but buyers won't buy it

substitute

satisfy similar need and desires; a rise in the price of one causes consumers to be more willing to buy the other

when two goods have a positive cross price elasticity, they are

substitutes

consequences of price floors: insufficiently high quality

suppliers forced to make a high quality of product but buyers wont buy it at that high price

quantity demanded

the ACTUAL QUANTITY consumers are willing to buy at a specified price

Quantity Supplied

the actual quantity that producers are willing to sell at a specified price

The midpoint formula

uses the average of the intital and final quantity and initial and final price; Ed= Quantity 1 - Quantity 2 / (Q1+ Q2)/2////// P1- P2 / (p1+ p2)/ 2

unit elastic demand

when the % change in quantity demanded is equal to the % change in price, The elasticity would be equal to 1


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