Chapter 2 Reading questions
How is consumer surplus calculated using equation 2.9?
.5(A-P)(Q).... Where A is Area, P is Price and Q is Quantity
How is producer surplus calculated using equation 2.1? (Figure 2.7)
.5(P*-B)Q
Review table 2.2. Know how the direction of the change in the determinant affects direction of the shift in the supply curve. Increase in supply are shifts to right, decrease in supply are shifts to left
Determinants: Prices, Sales Taxes, Technology, Number of Firms
What does producer surplus measure?
Difference between Total Revenues Received from the sale of a good or service and minimum needed to produce.....Equal to the firm's Operating Profit
Operating Profit
Firm's total revenue and expenses relating to firm's ongoing operations..
How do changes in consumer expectations affect market demand?
IF new car buyers believe prices for this years model will be lowered in october, the demand curve for new cars in septmeber will shift left.
How does the price of cheese affect the cheeseburger market?
IF the price of cheese goes down, output of cheeseburgers will go up. This will increase supply of hamburgers shifting supply curve to the right.....Also,
How did changes in technology affect supply?
Improved technogoly increases profits, shifting the curve to the right
Is the shift from the combination P1, Q1 to P2, Q2 an icnrease in demand or an increase in quantity demanded?
Increase in Quantity Demanded.
Figure 2.12. Shrift from S1 to S2 an increase in supply or increase in quantity supplied? (Quantity increases)
Increase in SUPPLY
How do taxes and other government regulations affect market supply?
Increased Taxes increase cost of doing business, so output will be lower..shifting to the left..Decreased taxes will shift the curve to the right.
How is a consumer surplus and producer surplus affected by a price ceiling?
It reduces Producer Surplus, and consumer surplus stays the same.
How does a change in the number of consumers in the market affect market demand?
More Consumers in a market would shift demand right
How does movement along a supply curve from point P1 to point P2 represent an increase in supply or an increase in quantity supplied?
Movement along a supply curve from P1 to P2 represents an increase in quantity supplied because people are willing to pay more for goods produced.
What is a shortage?
Occurs when prices are below equilibrium when Quantity Demanded excees Quantity Supplied
How do changes in supply differ from changes in the quantity supplied?
Price affects Quantity supplied, anything else effects change in supply.
Informative Advertising
Provides prospective consumers with information about new or existing products, such as the iPad tablet advertisements in 2010.
Inverse Demand Equation
Px = -(B/Bx)+(1/Bx)(Qx)
Market Demand Equation
Qd = B0+BxPx + BmM+ByPy 2. B is the Slope Parameters 3. Bx < 0 (Negative) because law of demand 4. Bm > 0 (Positive) if normal good..inverse 5. Bm < 0 (Negative) if inferior good. 6. By > 0 (Positive) If substititue..inverse 7. By <0 (Negative) if complement. related! 8. B0+BmM+ByPy can be summed into B 9. Qdx=B+BxPx..solving for P gives INVERSE Demand equation
If we assume the sizes of the slopes are known, and if we apply an assumption for a given level of income and for the prices of a related good, how does equation 2.1 collapse into equation 2.2? (Solved exercise equation 2.4 has an example)
Qdx = B+BxPx Where B is B=B0+BmM=ByPy
What is a surplus?
Quantity Supplied exceeds quantity demanded
What causes increase in demand from D1 to D2 (figure 2.11)
Research noting Cheeseburger eating is healthy increased the demand for cheeseburgers causing a shift to the right.
The Substitution Effect
When there is no change in purchasing power, an increase in the price of a good will cause buyers to unambiguously shift their purchases into a relatively less expensive substitute. This almost always dominates the income effect.
How does the higher level of demand affect market equilibrium price and quantity?
higher level demand shifts demand curve to the right, shifting the market equilibrium UP increasing price and quantity.
What is a price floor?
minimum legal price at which a good can be sold. Agricultural support and Floor WAges..minimum wage
What does a non-price rationing mechanism refer to?
non price alternatives to allocate products that are short in supply. An example is Queuing. Standing line for hours
opportunity cost
the most desirable alternative given up as the result of a decision of the substitute effect
Allocating Function of prices
using price information to reallocate inputs from lower to higher valued uses.
What effect does the price floor have on producer surplus?
Increases Producer surpluse
What do economists mean when they refer to the rationing function of prices?
The process by which changes in market-determined prices eliminate shortages and surpluses
What does the phrase "ceteris paribus" mean?
The quantity demanded of a good or service is is inversely related to its price. OTHER THINGS EQUAL
What is the law of demand?
there is an inverse relationship between price and quantity demanded...Pertaining to Market Demand. Downward sloping Demand Curve.
What does Px Represent (2.1)?
The price of good X
What does Consumer Surplus mean?
The value that the buyers received from the purchase of a good or service in excess to the amount paid
How does a change in demand differ from a change in the quantity demanded? (Conceptual)..Also need to see graphical differences
1. A change in Quantity Demanded is movement ALONG the same curve. The only thing that affects quantity demanded is Price. 2. A shift in the ENTIRE curve changes the demand. This means people want more at the same price. Some outside factor. Price NEVER shifts the demand crve.
Types of Inferior Goods
1. Accountants, Bankruptcy Lawyers, Automobile Repair Services, used cars.
How do prices of related goods affect demand for a good?
1. An increase in a substitute good will cause a right shift to the demand curve...A decrease in price of substitute good will cause a left shift. 2.An increase in the price of Coca-COla results in a decrease in the quantity demanded for Coca-COla....But an increase in the Demand by many consumers for relatively less expensive Pepsi Cola, or DP.
How do changes in tastes and preferences affect demand for a good?
1. An increase in advertising-inspired purchases is depicted as a RIGHT shift in the market demand curve. 2. If consumers have a positive opinion on ads, demand curve shifts right. If consumers have a negative opinion on ads, demand curve shifts left.
How does an increase in money income affect demand for a good?
1. An increase in consumers' money income will increase the demand for most goods and services. 2. Right-Sift in the market Demand Curve (D1 to D2) 3. A decrease in consumer's money would result in a left-shift of the demand curve.
What does the income effect refer to?
1. As a product's price declines, a buyer's real purchasing power increases. In contrast, as a Product's price increases, a buyer's purchasing power decreases.
What are the expected signs of the coefficients (Bx, Bm, By)
1. Bx = The good/product 2. Bm = Amount of money of consumers 3. By = Alternative substitutes/complements 4. M = Money PEr Capita.
What do we mean when we refer to goods as complements?
1. Goods are complements if they are to be consumed together. Such as a tennis rackets and tennis balls. 2. If Goods X and Y are complements, a decrease in the price of good y results in increase quantity demanded of Good y, and an increase in DEMAND for good X. if Good Y price goes up, the demand for good x shifts left.
Review table 2.1 and understand how increases and decreases in determinants cause the demand curve to shift (either to the right for changes that result in icnrease in demand or left that cause decrease in demand)
1. Income: a. Normal Goods Increase: Shift Right..Normal Goods Decrease: Shift LEft b. Inferior Goods: Increase: Shift left...Decrease? Shift Right 2. Tastes and preferences: a. Increase? Shift right...Decrease? Shift left 3. PRices of Related goods: Substitutes increase? Shift right..SUbstitues decrease? Shift left...COmplements increase? Shift left, Complements decrease? Shift right 4. Sales Tax Increase? Shift left..Sales tax Decrease? Shift right... 5. Population increase? Shift right..Population decrease? Shift left
If the demand curve represents the maximum price a consumer is willing to pay for a good, what is the difference between the total price paid by the consumer and the price received by the seller if a sales tax is added?
1. Increasing a Per-Unit Tax increases the price to the buyer to P+t = a-bQ..with P being Price and t being Tax amount. 2. P = (A-T) - bQ. 3. Increasign a per-unit sales tax lowers P-intercept but leaves the slope of demand equation unchanged. Parallel left shift of demand curve. More taxes = left shift.
What is the difference between a normal good and inferior good?
1. Normal Good: Increase in Money/preferences cause a shift to the right. 2. Inferior Good: Increase in Money/preferences cause a shift to the left. (As economic expands, demand for services of bankruptcy lawyers and accountants declines..Shifts to the
How is a shift from Point A to Point B in figure 2.1 different from a shift to the right of the entire curve from D1 to D2 in Figuire 2.2?
1. Shift from Point A to Point B notes that as the price decreases, quantity demanded increases.
Using the Demand Equation to differentiate between normal and inferior goods, and substitutes and compement.s
1. The Coefficient of M Determines if the good X is normal or inferior. Positive when X is normal, Negative when X is inferior. 2. The Coefficient on the price of good Y will determine if the other good is a substitute or a complement. IF it's a substitute, the coefficient will be positive. If it's a complement, the coefficient will be negative.
What does net social welfare measure?
1. The Sum of Consumer Surplus and Producer Surplus. 2. Demand Is a measure of Marginal Social Benefit (MSB) - cost of consuming an additional unit. and Supply is a measure of Marginal Social Cost - cost of increasign output by another unit....When MSB > MSC, it pays for society to increase output...When MSC> MSB society needs to reduce output..Net national welfare is maximized when MSB=MSC 3. Can be used to measure market efficiency. The greater the sum, the more socially beneficial it is
What do we mean when we refer to goods as substitutes>
A good is a substitute when it can replace the other good entirely
How do input prices affect market supply?
A lower input price will reduce production costs, and increase expected profit. Firms will increase output at each price, shifiting the curve to the right. Higher input price = shift to the left
Does a price ceiling result in a shortage or surplus?
A price ceiling results in an artificial shortage
How does the change in per capita income affect market equilibrium price and quantity? does it affect market demand or market supply?
An increase in Per Capita Income increases market equilbirium price and quantity. Right shift of demand curve
How do sellers respond to an increase in the price of the good?
An increase in Price from P1 to P2 results in an increase of the Quantity Supplied from Q1 to Q2.
What is a market?
Any arrangement that brings together buyers and sellers.
What are the factors that determine the total supply of the good?
As price of good X increases firms expected revnues and profits, firms will increase the number of units offered for sale.
In reviewing figure 2.3, how does the prince increase from P1 to P2 of good Y affect the demand shift from D1 to D2 for good X?
As the Price Increases from P1 to P2, the Quantity Demanded of good Y Decreases....This causes a right shift of Demand of Shift X, meaning people will pay the same price but want more of the substitute good.
Persuasive Advertising
Attempting to boost sales by creating an image that may have little or nothing to do with the product's physical characterstics
Why are some changes ambiguous?
Because it is not possible to know which side will dominate (Demand or supply) 1. Supply causes downard pressure but demand causes upward pressure.
How do the betas work with the demand determinants?
Betas determine the Slope!
What does deadweight loss measure?
Deadweight Loss measures the loss to consumers as a whole who have been able to acquire products at a lower price...Produce Deadweight is the loss to society as a whole from misallocation of resources and a less than optimal amount of product being supplied.
How does the change from shift from S1 to S2 affect market equilibrium aprice and quantity?
Decrease equilibrium price, increase equilibrium quantity.
What effect does price floor have on consumer surplus?
Decreases Consumer surplus.
How do changes in supply or changes in demand affect market equilibrium and amounf of consumer surplus and producer surplus?
Demand Is a measure of Marginal Social Benefit (MSB) - cost of consuming an additional unit. and Supply is a measure of Marginal Social Cost - cost of increasign output by another unit....When MSB > MSC, it pays for society to increase output...When MSC> MSB society needs to reduce output..Net national welfare is maximized when MSB=MSC
Does a price floor result in a surplus or shortage?
Surplus
Excise tax
Tax on each unit sold.. LEvied on specific goods, whereas sales tax is a general levy. Excise taxes are collected from the SUPPLIER, not the consumer.
What is a price ceiling?
The Maximum legal price that can be charged for a product.. 2. Must be set below market equilibrium price to prevent prices from rising. 3. An example is rent control. 4. Create artificial shortages.
What does M represent? (2.1)
The Per Capita Money Income
What is market equilibrium
The point at which Quantity supplied equals quantity demanded
What does Py Represent? (2.1)
The price of a related good
What is the law of supply?
The quantity supplied of a good or service is directly related to a change in it's market price.