Microeconomics (Chapter 1-7)
Graph of perfectly elastic demand
Horizontal line
Tax incidence
How the burden of a tax is distributed among the various people who make up the economy
Definition of Cross-Price Elasticity of Demand
Measures how the quantity demanded of one good responds to a change in the price of another good
Equilibrium
Quantity demanded Qd(P) = Quantity supplied Qs(P)
Shortage
Quantity demanded>Quantity supplied
Surplus
Quantity supplied>Quantity demanded
Cost
The value of everything a seller must give up to produce a good
Positive statements
Claims that attempt to describe the world as it is
Normative statements
Claims that attempt to prescribe how the world should be
Binding Price Ceiling
Below equilibrium
Shift of a decrease in quantity demanded
Demand curve shifts left
Shift of an increase of quantity demanded
Demand curve shifts right
What causes sellers to face most of the tax incidence?
Demand very elastic, supply very inelastic
What causes buyers to face most of the tax incidence?
Demand very inelastic, supply very elastic
Market failure
A situation in which the market on its own fails to produce an efficient allocation of resources
Binding Price Floor
Above equilibrium
Circular-flow diagram: -In the markets of goods and services.... -In the markets for the factors of production...
-In the markets of goods and services, households are buyers and firms are sellers. -In the markets for the factors of production, households are sellers and firms are buyers.
What happens to total revenue if: -demand is inelastic -demand is elastic -demand is unit elastic
-price and total revenue move in the same direction -price and total revenue move in opposite directions -total revenue remains constant when price changes
Variables that Shift Demand Curve
1) Income 2) Prices of Related Goods (complements vs. substitutes) 3) Tastes 4) Expectations 5) Number of Buyers
Variables that can shift supply curves
1) Input prices 2) Technology 3) Expectations 4) Number of sellers
2 conditions with taxes:
1) Qd(Pd)=Qs(Ps) 2) Pd=Ps+tax
Inelastic
<1
Consumer surplus of a purchase
= Max price willing to pay- price you actually paid
Producer surplus on an individual sale
= Price they actually got - cost of production
Total surplus
= Sum of all the surplus= Value to buyers - Cost to sellers
Unit elasticity
=1
Elastic
>1
Inferior good
A good for which an increase (decrease) in income leads to a decrease (increase) in demand
Normal good
A good for which an increase (decrease) in income leads to an increase (decrease) in demand
Price ceiling
A legal maximum on the price at which a good can be sold
Price floor
A legal minimum on the price at which a good can be sold
Why is the supply curve upward sloping?
As price increases, we can only add sellers because as we increase selling price, anyone willing to sell at a lower price still sells at a higher price.
Factors of production
Firms produce goods and services using inputs, such labor, land and capital (buildings and machines)=factors of production
Cross-price elasticity of complements
Negative
Equation for Cross-Price Elasticity of Demand
Percent change in quantity demanded of good 1/ Percent change in price of good 2
Income elasticity of demand
Percent change in quantity demanded/Percent change in income
Price elasticity of supply
Percentage change in quantity supplied/Percentage change in price
Trend with tax incidence
Person with more of an inelastic curve faces more of the tax incidence
Cross-price elasticity of substitutes
Positive
Price Elasticity of Quantity Demanded
Price Elasticity of Quantity Demanded= Percent change in Qd/ Percent change in Price
Consumer surplus is defined by an area bounded by:
Price axis, price curve, and demand curve (area above curve)
Producer surplus is defined by an area bounded by:
Price axis, price curve, and supply curve (area below curve)
Shift of a decrease of quantity demanded
Shifts to the left
Shift of an increase of Quantity Supplied
Shifts to the right
What does a price ceiling cause?
Shortage
Efficiency
Society is getting the maximum benefits from its scarce resources
What does a price floor cause?
Surplus
Market Power
The ability of a single person or firm (or a small group_ to unduly influence market prices
Productivity
The amount of goods and services produced by each unit of labor input
Law of Supply and Demand
The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance
Externality
The impact of one person's actions on the well-being of a bystander
Willingness to pay
The maximum amount that a buyer will pay for a good
Law of Demand
The quantity demanded of a good falls when the price of the good rises
Law of Supply
The quantity supplied of a good rises when the price of a good rises
Macroeconomics
The study of economy-wide phenomena, including inflation, unemployment, and economic growth
Microeconomics
The study of how households and firms make decisions and how they interact in markets
A curve shifts when...
There is a change in a relevant variable that is not measured on either axis
Equality
Those benefits are distributed uniformly among society's members
Total revenue
Total revenue= P x Q
Complements
Two goods for which an increase in the price of one leads to a decrease in the demand for the other
Subsititutes
Two goods for which an increase in the price of one leads to an increase in the demand of the other
Graph of perfectly inelastic demand
Vertical line
Opportunity Cost
Whatever must be given up to obtain some item
Why is the demand curve downward sloping?
You can only add buyers because anyone willing to buy at a higher price is still willing to buy at a lower price.