Unit 1 ECON

Relative Prices

Relative price of a good is its price in terms of another good The Relative Price is the opportunity cost of the good Your purchasing decisions are made on the basis of Relative Prices, NOT Absolute prices

The Demand Curve

The Demand curve reveals the quantity demanded at each and every price. The Demand curve is a willingness to pay curve. The Demand curve reveals the highest price for one more unit of the good.

Absolute Price

The Money price is the price in dollars

The Law of Supply

The higher the price, the greater the quantity supplied As the price rises, firms produce more of the good As the price falls, firms produce less of the good positive relationship between price of good and quantity supplied

Law of Demand

The higher the price, the lower the quantity demanded As the price rises, people buy less of the good As the price falls, people buy more of the good

Supply decreases AND demand decreases

When both supply and demand decrease (shift to the left) the equilibrium quantity will fall but the equilibrium price will be ambiguous

Supply increases AND demand increases

When both supply and demand increase (shift to the right) the equilibrium quantity will increase but the price will be ambiguous

Supply and demand shift in different directions

When both supply and demand shift in different directions the quantity is ambiguous. Quantity cannot be determined.

Supply and demand shift in the same direction

When both supply and demand shift in the same direction the price is ambiguous. The price cannot be determined.

complements

goods that go together (hamburgers and French fries--demand) or hamburgers and belts--supply

Consumer surplus

-measures the difference between what a person is willing to pay for a good and the amount he or she actually is required to pay, as indicated by the market price of the good -calculated as the difference between what they are willing to pay, as depicted by the demand curve, and what they actually have to pay as depicted by the equilibrium price. -the area of the triangle under the demand curve and above the price

Demand decreases

1 - Demand decreases 2 - A surplus exists at the original price 3 - Price falls 4 - Qd increases and Qs decreases? 5. Equilibrium quantity falls

Demand increases

1 - Demand increases 2 - A shortage exists at the original price 3 - Price rises 4 - Qd decreases and Qs increases 5 - Equilibrium quantity rises

Supply decreases

1 - Supply decreases 2 - A shortage exists at the original price 3 - Price rises 4 - Qd decreases and Qs increases 5 - Equilibrium quantity falls

Supply increases

1 - Supply increases 2 - A surplus exists at the original price 3 - Price falls 4 - Qd increases and Qs decreases 5 - Equilibrium quantity falls

Determinants of supply

1) Price of the good 2) Cost of inputs (resources of production) 3) Technology 4) Taxes and subsidies 5) Price expectations 6) Number of firms in the industry 7) Price of other goods substitutes in production complements in production

What do prices do?

1) Prices contain information about relative shortages and surpluses. 2) Prices coordinate the actions of producers and consumers. 3) Prices allocate scarce goods and services to their highest valued use. 4) Prices allocate scarce resources to their most efficient use.

Determinants of Demand

1) price of the good 2) income normal inferior 3) tastes & preferences 4) price of related goods substitutes complements 5) expectations 6) market size (number of buyers)

Shortage

A shortage exists when the quantity demanded exceeds the quantity supplied at a price below equilibrium.

Surplus

A surplus exists when the quantity supplied exceeds the quantity demanded at a price above equilibrium.

Shifts the entire demand curve

Anything other than a change in the price of the good will shift the entire demand curve: 2) income 3) tastes & preferences 4) price of related goods 5) expectations 6) market size (number of buyers)

Price floors and price ceiling

cause the quantity supplied to change, NOT the supply. They are a change in price.

Price ceilings

lead to shortages

Price floors

lead to surpluses

cost

what a seller must give up to produce the good. opportunity cost relative price

price

what a seller receives when the good is sold. • what a consumer pays when the good is purchased. absolute price or sticker price