Econ 302 Lesson 2
Inferior Good
A good that when consumers get richer demand contracts and when consumers get poorer demand expands
Normal Good
A good that when consumers get richer demand expands and when consumers get poorer demand contracts.
Complements
A good that when the price of Good A increases the demand for Good B contracts and when the price of Good A falls the demand for Good B expands
Substitutes
A good that when the price of Good Y increases the demand for Good Z expands and when the price of Good Y falls the demand for Good Z contracts
Change in Demand
A rightward or leftward shift of the entire demand curve; caused by a change in something other than the price of the good
Multivariable Demand Function
Mathematical relationship between quantity demanded and the several variables that can affect it
Multivariable Supply Function
Mathematical relationship between quantity supplied and the several variables that can affect it
Inverse Supply Function
Mathematical relationship where price is a function of quantity supplied
Demand Function
Mathematical relationship where quantity demanded is a function of price
Supply Function
Mathematical relationship where quantity supplied is a function of price
Isoelastic Demand Curve
demand curve with a constant own-price elasticity
Expansion in Supply
rightward shift in supply curve
Comparative Statics
the economic analysis where you compare the original market equilibrium to the equilibrium that exists after some change in the market has occurred
Perfectly Elastic
even a tiny change in price will bring about an infinite change in quantity demanded; e=infinity
Contraction in Supply
leftward shift in supply curve
Goods that are more elastic have
many good substitutes; longer times for consumers to adjust their behavior; larger shares of the consumer's budget
Inelastic
percentage change in quantity is smaller than the percentage change in price 0<e<1
Elastic
percentage change of price has brought about a larger percent change in quantity; 1<e<infinity
Unit Elastic
percentage change of price has brought about an equal percent change in quantity; e=1
Ceteris Paribus Conditions of Demand
Income, prices of related goods, and everything else must all be held constant when changing the price of a good in a demand curve. If one of those things changes, you must redraw the demand curve as a response
Ceteris Paribus Conditions of Supply
Input prices, production technology, everything else: producer expectations, number of sellers
Ceteris Paribus
Latin phrase meaning "all else constant"
Contraction of Demand
Leftward shift of the demand curve
Law of Supply
1. There is a positive relationship between the price and quantity supplied. 2. An increase in price will cause an increase in quantity supplied ceteris paribus. A decrease in price will cause a decrease in quantity supplied ceteris paribus
Law of Demand
1. There is an inverse relationship between price and quantity demanded. 2. An increase in price will decrease quantity demanded ceteris paribus. A decrease in price will increase quantity demanded ceteris paribus
Shortage
occurs when quantity demanded is greater than quantity supplied
Surplus
occurs when quantity supplied is greater than quantity demanded
Demand Changes from changes in Number of Consumers
At any given price, if the size of the population of consumers grows, then the demand will expand. At any given price, if the size of population of consumers falls, then the demand will contract.
Demand Changes from changes in Consumer Expectations
If the Future Price of a good is expected to be higher than previously thought, then the demand today will expand. If the Future Price of a good is expected to be lower than previously thought, then the demand today will contract
Expenditures and Revenues
P*Q
Expansion of Demand
Rightward shift of the demand curve
Inverse Demand Function
The mathematical function where price is a function of quantity demanded
Choke Price
The price at which quantity demanded is equal to zero. The constant is an inverse linear demand curve
Change in Supply
a rightward or leftward shift of the entire supply curve
Elasticity
a measure of responsiveness of one variable to a change in one of its determinants
Income Elasticity
a measure of responsiveness of quantity demanded of good X to a change in the incomes of consumers; positive sign implies normal good and a negative sign implies inferior good
Own-Price Elasticity of Demand
a measure of responsiveness of quantity demanded of good X to a change in the price of good X
Cross-Price Elasticity
a measure of responsiveness of quantity demanded of good X to a change in the price of good Y; negative sign will imply complements and a positive sign implies substitutes
Own-Price Elasticity of Supply
a measure of responsiveness of quantity supplied of good X to a change in the price of good X
Price Gouging
a pejorative term for when suppliers raise price above what is deemed "fair"
Speculation
buying and selling of goods today based on predictions of future market conditions; this buying and selling today can cause prices to change
Perfectly Inelastic
change in price has no effect on quantity demanded or supplied; e=0
Market-Clearing Price
price at which quantity demanded is equal to quantity supplied
Input Price
the price of a good that is used in the production of something else; when an input price into the production of good X goes up, the supply of good X contracts; when an input price into the production of good X goes down, the supply of good X expands
Equilibrium
when there is no incentive to change behavior