economics midterm

movements along supply price

· Analyzing how changing market conditions shape quantity businesses supply- movements along and shifts of If only thing that changes is price it's along- if other m· market conditions change, think about shifts of the supply curve - Doesn't shift following a price change because already summarizes price quantity relationship- neither individual or market will shift- summarizes how they respond to different prices- assess consequences of price change

marginal principle

- Marginal principle- decisions about quantities are best made incrementally- whenever you face a decision about how many of something to choose, break it into a series of smaller, or marginal decisions, like if you should include one more of x - Evaluate whether the extra benefit from hiring one more worker exceeds the extra cost of that extra worker- we call the extra benefit you get from one more worker the marginal benefit and the extra cost of that worker is the marginal cost- apply cost-benefit principle to this marginal choice- see if the marginal benefit is at least as large as the marginal cost- apply this iteratively

individual demand

- Often face the same question- at this price, what quantity should you buy? - Ask if the price is this, how many gallons would you buy? Think about how the price would change how much you drive and then how much you'll buy- willingness to pay

demand shift your preferences

o Changes in preferences- becomes a parent, gets married, marketers trying to figure out how changes in people's demand due to life events changes market- companies try to influence our preferences through advertising, social pressure can shift your demand curve- rising environmental awareness, fashion cycles like the pandemic and pandemic going away

supply shift input prices

o Choices other businesses make affect your decisions- when suppliers change price of inputs they change marginal costs and shifts your supply curve- a rise in marginal costs causes the price associated with any point on curve to rise because marginal cost is supply curve- leftward shift, decline in input costs will shift to right- changes in inputs like oil or hourly wage or changes in foreign exchange rate will all shift curve

economic surplus

- - the total benefits minus total costs flowing from a decision- it measures how much a decision has improved your well-being- cost-benefit principle means every decision you make will have larger benefits than costs- want to maximize - Cost-benefit principle- choices will increase economic surplus- generate with every decision with principle- benefit-cost- both sides can be better off if they have different costs/benefits- both buyers and sellers benefit from voluntary exchange- all transactions will yield economic surplus- the heart of all economic transactions- not a winner/loser, cooperation

equilibrium

- A market is in equilibrium when the quantity supplied is equal to the quantity demanded- the point at which there is no tendency for change- every seller who wants to sell an itema t the current price can find a buyer and every buyer who wants to buy at current price can find a seller- balancing, no tendency for market price to change when they're equal- only one price at which quantity supplied equals quantity demanded- equilibrium price- the price at which the market is in equilibrium- the resulting quantity is the equilibrium quantity- the quantity demanded and supplied when the market is in equilibrium

markets

- A market- a setting bringing together potential buyers and sellers, demanders and suppliers- everywhere, whenever you spend money buying something you're acting as a demander and getting paid means a supplier - Markets are everywhere- buying labor, buying credit/loan, having savings means you're a supplier of credit, global market- buying from China sets of chain of global transcations- each involve buyer and seller meeting in a market and there's a price that plays a central role- price, wage, interest rate, foreign exchange rate - Take an expensive view of markets- beyond what you buy and sell if take creative view of prices- voters supplying votes, price is work on campaigns and the better the more likely you supply vote, marriage market where price is love and demand is getting a spouse- market for grades- demand and supply- see markets everywhere, pervasive economic forces help you make better choices across all life How Markets Are Organized - Sometimes price is posted, auction, online markets, negotiation, bidding- all markets because bring buyers and sellers together- outcomes determined by force of supply and demand we already know- supply and demand curves we study are characterized by perfect competition- involves many buyers and mant sellers or an identical good and each of these buyers is small relative to the whole market- many markets are not perfectly competitive- later will see how it changes with competition- only do PC here and how supply and demand interact

individual supply curve

- An individual supply curve- a graph that shows the quantity that a business plans to sell at each price; it summarizes a business's selling plans- you can graph for anything you might sell, not just financial things- just think of quantity you'd sell at each price - An individual supply curve graphs your selling plans- graphing conventions are the same as demand curve- price goes on vertical axis, quantity on horizontal axis- each point represents separate point on supply curve- each point shows that as the price rises, the quantity they plan to supply also rises to the final point- connect the dots to estimate supplied at prices in between- individual supply curve- the quantity the company will supply at each price- at some points, it's best to supply zero- for any company, there's a point where the price is sufficiently low that your best choice is to minimize your losses by temporarily shutting down operations until the price rises aga in - An individual supply curve holds other things constant- given current economic conditions, nothing else changes- holding other things constant- not applying interdependence principle- what happens when only the price changes - Individual supply curve is upward-sloping- at higher prices, they supply a larger quantity- every business has individual supply curve- graph will show exactly how higher price leads to larger quantity supplied- may assess prices by running a survey - If you can sell something for a higher price, you'll sell more of it holding other things constant- this is the law of supply- the tendency for the quantity supplied to be higher when the price is higher - You are a supplier when you offer something in exchange for something else- services, items, labor, education- in exchange for what tells us about the price, financial or not

how taxes change market outcomes

- Government might use measures to cut something unhealthy, special taxes that drive up price so people buy fewer of them- role in driving up price and downs sales and prices received by sellers- taxes do- reduce both the quantity demanded and supplied of taxed good as buyers pay more and sellers receive less- government takes a cut of the tax

systematic framework

- Individual decisions are the atom or the foundation of all economic forces- decisions and those of others collectively determine what's made, who gets it, and whether it yields fair outcomes- economic analysis begins at these small choices that produce broad economic outcomes - Systematic framework for analyzing individual decisions- costs and benefits of a choice, consider the alternatives/or what/opportunity cost, margin and whether more/less is better/marginal principle, decisions depend on each other/interdependence principle- challenge is applying

realistic theory of supply

- As sellers experiment, they may come to act as if they follow the core principles o Many sellers like smaller businesses won't use deep analytics- they experiment with quantity and see how it affects profits- experimentation leads managers to continue to make better decisions until they've eventually discovered the quantity that maximizes their profits- Rational Rule provides direct path to this but those who experiment will end up making exact same choices- will help forecast what choices a manager will make - Survival of the fittest will weed out bad managers o Leads businesses to maximize profits those who follow rational rule will be most successful so others will go out of business- closer to maximizing profits, more likely to survive- make decisions as if they were following rule - Thinking through the principles provide useful advice and helpful forecasts o Provides useful advice to sellers to earn largest possible profit- focus on marginal costs when making supply decisions o If you need to forecast supply decisions you can apply the rational rule to them and their costs- can infer a competitior's costs by analyzing their supply decisions against the rule- supply curve is marginal cost curve

individual to market supply

- Can build market supply curves by adding up individual supply curves of all potential suppliers - Market supply is the sum of the quantity supplied by each seller o For each price market supply curve illustrates the total quantity supplied by the market- figure out total quantity supplied when price is 1, 2, 3, etc- simply add up the quantity supplied by each supplier o Shortcut- if 100 suppliers are making same supply decisions at any price the quantity supplied will be 100 times the quantity one supplies- built from individual supply curves so same factors like rising marginal costs shape them - How market analysts estimate supply curves o More complicated because businesses are not identical- need to figure out how much each supplier will supply at any price- survey businesses, ask how much they will each supply at any price, how different segments of market will increase quantity supplied as price changes- survey also those who would enter market when price is high

dependency between market

- Changes in prices and opportunities in one market affect choices you might make in other markets- housing/credit, school/housing, labor/school, car/labor, ignoring may make you consider each market in isolation but miss part of story

dependency between economic actors

- Choices made by people, businesses, governments, other groups shape choices available to you- competing for society's scarce resources- more others get, less left for you- best choice depends on decisions others make- competing buyers and sellers, competitors

cost-benefit principle

- Cost-benefit principle says costs and benefits are the incentives that shape decisions- before you make any decision you should evaluate the full set of costs/benefits associated with that choice- pursue that choice only if the benefits are at least as large as the costs- remembered as "incentives matter"- costs and benefits define the incentive - Relevant for any choice- seems obvious but more challenging than it sounds- think broadly about what constitutes a cost or benefit

supply equals demand

- Curves summarize the purchasing and producing decisions of all participants in the market- equilibrium is point at which the curves cross because this is where quantity supplied equals quantity demanded- use graph and table to see to see where they are equal- find equilibrium price and quantity- markets have a tendency to move toward equilibrium and once they find it prices/quantities stop changing until they are disturbed - Prices are determined by both supply and demand- water is essential but cheap- water is plentiful and costs little to produce unlike diamonds - Prices are determined at the margin- demand curve is marginal benefit curve and supply curve is marginal cost curve- need to think about marginal benefit and not total- total benefit of water is high and necessary but if price rose you might still reduce consumption- marginal gallon is inessential so willingness to pay is low because gives limited marginal benefit, but if drought becomes much higher

shifts in supply

- Factors other than price change, revise plans about quantity for each price- price of inputs, productivity, other options, expectations change quantity at any price and shift curve- change supply plans- anything that changes your marginal cost- out-of-pocket and opportunity costs too- lower marginal costs increase quantity/price and shift right and opposite- all about interdependence principle- best supply decision depends on many other factors and when those change so will supply- I, POET

similar demand and supply principles

- Forces are closely related, anyone can be viewed as buyer or seller in any scenario- one set of principles that apply different ways, good decisions as buyer and as seller and some differences- demand is motivated by desire by consumers to maximize economic surplus, while businesses on the supply size are trying to maximize profits - Objective: demand- maximize economic surplus, which is difference between benefit you get and price you pay- supply- maximize profits, which is difference between revenues and costs - To decide on quantity follow the- rational rule for buyers- buy one more if marginal benefit exceeds price- rational rule for sellers- sell one more if price exceeds marginal cost - Implying- demand curve is also marginal benefit curve, supply curve is also marginal cost curve - Curve slopes- demand down because of diminishing marginal benefit, supply up because of increasing marginal cost - The market demand curve is sum of quantity each consumer demands at each price, market supply is sum of quantity each business sells at each price - A rise in price causes movement along demand curve reducing quantity demanded, a movement along supply curve raising quantity supplied - A fall in price causes a movement along demand curve raising quantity demanded, a movement along supply curve reducing quantity supplied Demand shifts- income, preferences, complements/substitutes, expectations, congestion/network effects, type/number of consumers- supply shifts- input prices, productivity/tech, substitutes and complements in production, expectations, type and number of sellers

individual supply

- Given the price of our product, what quantity should we supply? If the gas price rises, how much should they increase production specifically, and if it falls how much should they cut back, halt production- ideal quantity to produce and sell varies depending on the price

market supply

- Go from individual firm to market supply- total quantity of an item supplied across all firms in the market- market supply curve plots the total quantity that the entire market including all producers will supply at each price

willingness to pay

- Hardest part is figuring out how to compare different aspects of a decision- how to quantify the qualitative - Convert costs and benefits into dollars by evaluating your willingness to pay- money equivalent- what is the most you would be willing to pay to get/avoid cost/benefit - Willingness to pay: the maximum amount a buyer would be willing to pay for something. To convert costs/benefits into money equivalent, ask yourself- what is the most I am willing to pay to get this benefit/avoid that cost? - Ask yourself about your willingness to pay before you look at the price- max price- get to same unit to apply principle - Money is the measuring stick, not the objective. Not unhealthy obsession with money or only what matters, but allows us to compare wide variety of costs and benefits and account for financial and nonfinancial aspects of decision- how we take our measurements- imagine living without benefit to quantify- the benefit can be unrelated to the price like free Google - Cost-benefit principle isn't selfish if you aren't- must be financial and nonfinancial like generosity and values- think broadly to make unselfish choices

upward sloping market curve

- Higher price of gas leads to higher total quantity of gas to be supplied- upward sloping- higher the price the greater quantity supplied- obeys law of supply - A higher price leads individual businesses to supply a larger quantity- market curve is adding these together so it also gets these upward characteristics - A higher price means more businesses are supplying their goods and services- a lower price means fewer businesses are doing so- higher price makes it more profitable to be a supplier which makes more enter the market and then a higher quantity, lower price means fewer profitable so less willing to supply

figuring out whether markets are in equilibrium

- How can you tell equilibrium? Check whether prices are changing- rising is sign there's a shortage, falling is sign there's a surplus, sometimes process is slow or not able to change- excess supply or demand spills over to other domains- parking meter issues- demand-responsive pricing - There are three symptoms of a market in disequilibrium, or a market out of equilibrium o Queuing- waiting in line, driving around, extra time spent- raises effective price you're paying because it costs you time- sign of a shortage o Bundling of extras- got something just so you could get something else then were buying extras to get what you wanted- shortage- raises price you're paying for first thing o Secondary market- found a way around the official market- ebay for instance - Each symptom serves to raise the effective price even when price charged by sellers can't directly rise- if problem is a surplus symptoms will be in reverse in a way that lowers the effective price- queue to meet buyers, demand extras be bundled for free and throw in upgrade, lower on secondary market

cross-price elasticity of demand

- How one decision impacts decisions in other markets- buy less gas, choosing something else- means her demand for public transportation increases- cross-price elasticity of demand- measures how responsive the quantity demanded of one good is to price changes of another- percent change in the quantity demanded following a 1% change in the price of another good- measure as ratio of percent change in quantity demanded to percent change in price of another good- sign is important- positive means buy more of a good when price of another good goes up, negative means buy less- determined by substitutes or complements - The cross-price elasticity is positive for substitutes- buy more of a good when the price of its substitute increases- measure between two different goods- elasticity is positive means they are substitutes but not close substitutes - Cross-price elasticity is negative for complements- quantity demanded falls in response to a rise in the price of another good- go well together- shows how close complements they are and how much you can charge- large negative are huge complements - The cross-price elasticity is near zero for independent goods- unrelated

choosing best quantity to supply

- If perfect market, focus attention on what quantity to supply at any given price- transform spreadsheet to plan - Apply core principles to your supply decisions- figure out what quantity to supply at each price, repeat for whole range of prices to map whole supply curve- thinking at the margin means asking- should you produce one more? The margin principle says that decisions about quantities are best made incrementally and that you should break "how many" questions into a series of smaller marginal choices- ask should I produce one more instead of how many - Compare marginal benefit and marginal cost- defends on cost benefit principle- might think in bigger units- focus on marginal beenfits/costs - Marginal benefit is the amount of money you'll get for additional unit- often the price- in a PC market, marginal benefit is market price - Marginal cost- would be hours, materials, other costs for production- marginal costs include variable costs but exclude fixed costs o Think about what expenses to include in your calculation of marginal cost- apply opportunity cost principle by asking or what- compare to next best altenrative- usually not expanding production- opportunity costs- variable costs- costs like labor and raw mateirals that vary with the quantity of output you produce- marginal costs are additional variable costs o Cost of refinery structures and equipment for instance- have to pay for these even if it pursued next best alternative of not expanding production, land, CEO- fixed costs- these costs that don't vary when you change the quantity of output you produce- pay whether or not you expand your production, not part of opportunity cost of producing more gas- irrelevant to marginal cost- make sure marginal cost only reflects variable costs and not fixed costs

individual decisions drive market demand

- Individual and market demand, total market demand for all buyers- want to know how much people will buy at each price- what curve reveals, best choices given limited income which demand addresses, intertwined with market curve - How much should I buy? Rational ruler for buyers- buy more of an item if the marginal benefit of one more is greater than or equal to the price- follow consistently and will keep buying until marginal benefit equals price- individual demand curve is marginal benefit curve- tendency towards diminishing marginal benefit means marginal benefit curve/demand curve is downward-sloping- demand is all about marginal benefits- Rational Rule for buyers is application of rational rule to buying decisions where marginal cost is price- everything is applying rational rule - How can managers forecast the total quantity they will sell? Forecast how changing economic conditions will affect quantity they will sell- price changes causes movement along and changes total quantity demanded- raises/reduces, factors that shift demand curve- increase is right and decrease is left- interdependence has six factors that shift demand curves- income- higher income increases demand for normal goods but decreases demand for inferior goods- preferences- demands for particular goods can increase/decrease as desire changes by trends, advertsing, social pressure, lifestyles, other factors and advertisers will try to change demand- price of related goods- increase if price of substitute goods rises or price of complementary goods falls- expectations- prices rise, today's demand will increase, prices fall, today's demand decreases- congestion and network effects- network effects become more popular demand increases, goods will congestion effects become more popular demand will decrease- type and number of buyers- increase due to population growth, immigration, international markets- demographic change- not individual demand - 100 dollars today can be worth more than 100 in the future- interest rate is 5%, 100 becomes 105- in general for annual accruing interest, present value = future value /(1+r)^t, where future value is t years in the future - What does the demand curve tell you? At any price, what is the quantity de

individual demand curve

- Individual demand curve- a graph that plots the quantity of an item that an individual buyer plans to purchase at each price- each dot corresponds with a different quantity based on the price- straight line between points provides reasonable data for prices the person wasn't asked about- the quantity they will demand at each price is their individual demand curve - Individual- one person, demand- buying decisions, curve- graphing it- summarizing your buying plans and how they vary with price - Price on vertical/Y and quantity on horizontal/X- don't forget to label units- dollars per gallon? - An individual demand curve holds other things constant- if something happened/another factor, the curve would change, so to acknowledge this a demand curve is graphed holding other things constant- other things than price can influence demand but consider when the price changes first- pushing factors aside/holding them constant to understand the price quantity relationship - Ceteris paribus/holding other things constant- a commonly used qualifier noting that you conclusions may change if some factor that you haven't analyzed changes - The individual demand curve is downward sloping- means that as price falls quantity demanded rises - Whenever you see a price a pause to decide whether to purchase or how many to purchase, you are considering quantity vs demand

shifting supply curves

- Interdependence principle- best choice as a seller depends on other factors beyond price and when these factors change so might your supply decisions- price of crude oil rises, would revise supply plans or if they discover more efficient production processes or if more profitable to shift to another line of businesses - Quantity willing to supply at any given price will change- changing conditions lead sellers to revise plans and create new curve- shift in the supply curve- movement in the supply curve itself- supply curve is also marginal cost curve, any factor that changes marginal costs will shift your supply curve - A rightward shift is an increase in supply because at every price quantity is higher, leftward is decrease in supply because quantity is lower at each and every price - Interdependence principle tells us suppliers choices depend on many toher factors and when those shift so will selling plans which shift supply curve - Input prices, productivity and technology, prices of related outputs, expectations, type and number of sellers- shift individual/market supply - Changes in first four shift individual and then the market cuve- fifth only shifts market supply curve - Recurring theme- any factor that changes marginal costs including opportunity costs will cause a shift in supply

income elasticity of demand

- Interdependence principle- consider how decisions linked to income changes- how responsive? Income elasticity of demand- measures how responsive your demand for a good is to changes in your income- by what percent the quantity demanded will change following a 1% change in income- measured as ratio of percent change in quantity demanded/percent change in income - The income elasticity of demand is positive for normal goods- change in demand goes in same direction as change in income- necessities tend to have small income elasticity for same reason price elasticity is inelastic- not really impacted by income Income elasticity of demand is negative for inferior goods- quantity of inferior goods moves in opposite direction as income

interdependence principle and shifting demand curves

- Interdependence principle- reminds you a buyer's best choice also depends on many other factors beyond price, and if any of these other factors change, so might their demand decisions- ex: quantity could change when pay raise, traffic decrease, or alternatives have price change- no longer holding these constant, the demand curve may shift- when demand curve itself moves, we refer to it as a shift in the demand curve- because your demand curve is also your marginal benefit curve, any factor that changes your marginal benefits will shift your demand curve - A rightward shift is an increase in demand, because at each and every price the quantity demanded is higher - A leftward shift is a decrease in demand because the quantity demanded is lower at each and every price - The interdependence principle reminds you that buying choices depend on other factors- when they shift, so will buying plans and the demand curve- key factors are o Income o Preferences o Price of related good o Expectations o Congestion and network effects o Type and number of buyers - Changes in first five shift individual demand curves, and because market demand is built on individual, they shift market - The type and number of buyers only shifts market demand curves

rational rule for buyers

- Keep buying until marginal benefit is greater than or equal to the price - The Rational Rule for Buyers- buy more of an item if the marginal benefit of one more is greater than or equal to the price- combines 3 principles - Decision also depends on other not economic factors- if other things change, so will plans with interdependence principle later - Follow rational rule for buyers to maximize your economic surplus- the difference between his total benefits and total costs- because this purchase will boost total benefits more than it boosts total costs- take every opportunity to maximize economic surplus - Exactly equal- this decision doesn't make a difference because it won't make you better or worse off, continue to buy up to and including when marginal benefit equals price/cost for simplicity- keep buying until marginal benefit = marginal cost- stop buuying right before marginal benefit of next gallon falls below the price- right before marginal benefit equals the price- price=marginal benefit - Demand curve is also your marginal benefit curve- understanding demand requires remembering one phrase- price=marginal benefit- WHY? Confused o Demand curve is price you will buy a quantity at- keep buying until price equals marginal benefit- then curve is marginal benefit of each gallon of gas - Demand curve reveals marginal benefits- demand curves are marginal benefit curves, so what they buy is their marginal benefit - Diminishing marginal benefit- each additional unit yields a smaller marginal benefit than the previous unit- this explains the downward slope- eventually after eating a lot you will become satiated- less priority use as it goes on- each additional purchase yields lower marginal benefit, why curve is down, buy extra only if price is lower

law of demand

- Law of Demand- the tendency for the quantity demanded to be higher when the price is lower - Aka, quantity demanded is lower when the price is higher - Allows us to predict how others will respond to different prices

rising marginal costs and upward slope

- Law of supply says quantity supplied tends to be higher when price is higher- supply curve is upward sloping - If follow rational rule for sellers, supply surve is also marginal cost curve- marginal cost curve is upward sloping so supply must be too- increase the quantity you produce, the marginal cost of producing an extra gallon of gas rises- reflects bottlenecks that arise when you try to expand production - Diminishing marginal product leads to rising marginal costs- expanding your production requires increasing your use of outputs like labor- the extra output you can from an additional unit of input like hiring one more worker- is called the marginal product of that input - Marginal product- the increase in output that arises from an additional unit of an input like labor - Diminishing marginal product- the marginal product of an input declines as you use more of that input- doesn't mean extra inputs will reduce your output, but that produced by next worker won't be quite as large as extra output produced by previous worker you hired - Short term- Diminishing marginal product can occur when some of your inputs are fixed- extra workers might make it too busy to accomplish anything, extra workers might need the same equipment being used, fixed plot of land and too many farmers - Long run- can expand production by increasing all your inputs- hiring more workers and buying more equipment and land- will have less experience and take longer to get things done, hard to find more land, to find new ideas, hard to manage so many things and coordinate- at some point adding extra inputs won't produce as much as extra output and marginal costs will rise- think about working on a paper/studying and how the grade boost per hour will decrease - Rising input costs can also lead to rising marginal costs- cost of inputs might rise- opportunity cost of input rises as you buy more of it- might need to pay more or time and a half- rising costs of inputs

dependency between your own choices

- Limited resources, choices affect resources available for every other decision, follows from constraints you face- budget constraint due to limited income, limited time because 24 hours in a day, limited attention, limited production capacity, limited wealth to invest- other ones could be energy, cognitive capacity, limited willpower

no framing

- Make choices based on costs/benefits you face rather than how they are described or framed- no deals- look at price presented and no other price to answer questions- sellers may also show higher-priced alternatives like crazy expensive option- your cost and benefits- most people choose different decisions based on ways things are framed/worded- framing effect- when a decision is affected by how a choice is described, or framed- avoid framing effects altering your decisions- common but not rational- rigidly follow cost-benefit principle - Calculate costs and benefits relative to your next best alternative- compare for opportunity cost principle

individual to market demand

- Market demand is the sum of the quantity demanded by each person- individual demand curves are the building blocks of market demand- total quantity demanded when price is each price, at each price, total quantity is the sum of quantity each customer demands at that price- price X number of customers - Market demand curves: o Step 1: survey customers, asking each person the quantity they will buy at each price o Step 2: For each price, add up the total quantity demanded by customers- add up QUANTITIES, not price o Step 3: scale up quantities so that they represent the whole market- make sure they represent the population of that market accurately- multiply both amounts to equal amount of people in whole market o Step 4: plot total quantity demanded at each price to draw market demand curve

price elasticity of supply

- Measure how much sellers will respond to price rises and what drives their response Measuring Responsiveness of Supply - Price elasticity of supply- measures how responsive sellers are to price changes- measures by what percent the quantity supplied will increase following a 1% price change- larger percent change in Q supplied the more responsive they are to price changes- same ratio but for supplied - Price elasticity of supply is positive- changes in price lead to changes in quantity supplied in same direction- raising price increases quantity supplied while lowering the price reduces the quantity supplied- a bigger absolute value means more responsive to price changes but no need for absolute value - Quantity is relatively unresponsive when supply is inelastic- can't increase quantity supplied by as much in response to higher prices- inelastic- PC Q is less than PC P- smaller than 1, steep curve - Quantity is relatively responsive when supply is elastic- quick to change prices, elastic, magnitude of PCQ larger than PCP, +1 - Perfectly elastic and inelastic supply represent the extrmees- completely horizontal- elasticity is infinite- perfectly elastic supply, verticall is 0 perfectly inelastic supply and unchanged- two passing through one point one that is flatter is more elastic

getting to equilibrium

- No tendency for change, move towards point, can predict whether prices are likely to rise or fall - Shortages cause the price to fall o When price is below equilibrium level- shortage results- quantity demanded far exceeds quantity supplied, too many people and too little product- long lines and out of product- suppliers will raise their price as long as shortage persists- less willing to pay higher price so that limits the shortage o Shortage- quantity demanded exceeds quantity supplied - Surpluses cause the price to fall o When price is above equilibrium, surplus results- quantity supplied far exceeds quantity demanded- trying to get rid of product, will lower prices to try to get more demanders, more will be willing to buy o Surplus- when the quantity demanded is less than the quantity supplied When out of step competition forces push towards equilibrium to eliminate shortage/surplus- help you figure out where prices are going, up or down

economics

- Not just about money, business or government policy but helpful for understanding these- better thought of as a way of thinking- can also help understand politics, families, careers, all aspects of life- help manage your money, employees, business, time, energy, and relationships- guidance on small decisions or good ones - All of economics built on small principles that define what it means to think like an economist- learn systematic approach to thinking about the world

economic approach

- One famous definition calls economics the study of people in the ordinary business of life- principles for business are principles of life, all decisions are economic, toolkit, principles into actions to make better personal/professional choices- doing economics every single day- microeconomics- study individual decisions and their implications for specific markets- macroeconomics- trace broader implications of individual decisions across the whole economy

binding quantity regulations

- Only impact when binding- binding mandate occurs when equilibrium quantity would be lower without the mandate- to the right of equilibrium- increases quantity, purchase car insurance- binding quota occurs when equilibrium quantity would be higher without quota- to the left- limits how many can be sold/they can buy- lower than what would be without quota- ex zoning laws- less housing and higher prices- quotas raise prices - Quotas are quite common- government regulations- immigration quotas, China, trade quotas, medical residents, environmental quotas, etc - Figure out if regulation is binding- maximum or minimum- determine new price and quantity- price regulation- new price is regulated price and need to find quantity- determined by forces of supply/demand and is minimum of quantity demanded/supplied- with regulation- quantity determined by regulation and forces determine price- with on sellers is determined by what buyers are willing to pay and on sellers is what suppliers are willing to supply

opportunity costs and scarcity

- Opportunity cost- the true cost of something is the next best alternative you have to give up to get it - Decisions reflect opportunity cost and not just out-of-pocket costs because of what you must give up- money, time, alternative uses- assess consequences relative to best of alternatives- real tradeoffs you face to make better decisions- when economists say costs they mean opportunity costs- thinking just financial is misleading- think what is the best alternative you are forced to give up? Help you better allocate scarce money, attention, and resources - Opportunity cost highlights the problem of scarcity- always an opportunity cost even if no out of pocket- making a choice is implicitly choosing not to do something else- resources are limited/scarce- time, money, attention, willpower- any one is fewer for another, tradeoff - Scarcity: resources are limited, therefore any resource you spend pursuing one activity leaves fewer resources to pursue others- implies you always face a trade-off- road not taken

understanding markets

- Organize society- what goods produced, who produces, where, how, materials, each good produced most efficiently by lowest cost supplier, how to allocate among demanders, who would value- rely on markets to organize what is produced, how it's produced, and how it's allocated- no planned economy- centralized decisions are made about what and how goods and services are produced and allocated- we have market economy- each individual makes their own production and consumption decisions, buying and selling in markets- use prices and incentives to allocate prices

shifts in demand

- Other factors change- might revisit buying plans- lead him to change how much he'll buy even if price stays same- when these factors change quantity at specific price, shift in demand curve- has something changed that would cause you to give difference answers to survey about quantity you'd demand at each price? Not every change in market conditions causes demand curve to shift- changes don't change your answers then demand hasn't shifted, but if they do then it might change things- interdependence principle in action - PEPTIC is acronym to remember

calculating price elasticity of demand

- Percent change to compute elasticity of demand- calculate percent change- depends on where you start- need a consistent measure - Use the midpoint formula to calculate the percent change in price and quantity- change relative to a baseline midway between two points- divide difference between two points by average of two points - Percent change in quantity= Q2-Q1 /average of Q x 100- divide difference between them by average of two price points- same for price with P - Divide then percent change in quantity by percent change in price- use midpoint formula for PC Q and PC P and divide

predict market outcomes

- Predict how markets respond to changing economic conditions, predictive- determine which curve is shifting (supply, demand or both)- any change with buyers/marginal benefits shift demand curve and sellers/marginal costs shift supply curve- determine if increase/right or decrease/left- increase in marginall benefit increase demand but increase in cost decrease supply- determine how prices and quantities will change in new equilibrium

combined shifts in demand

- Predict how prices will change when economic conditions change Shifts in Demand - What happens to equilibrium price/quantity when demand curve shifts- when buying plans change but not a change in price - Any change that leads to buy a larger quantity at each price is an increase in demand and shift right - If smaller quantity at each price it's a decrease in demand, shifting demand curve left - Market will find a new equilibrium when demand shifts- increase in price and quantity at new value or vice versa- a decrease - An increase in demand leads to a higher price and a larger quantity- shift right and movement along supply curve- where new curve intersects and read off new equilibrium price and quantity- higher- look at axis to see change in price and in quantity- means that buyers want to buy more at old price but sellers don't want to supply more- price needs to increase to prevent a shortage, which raising price makes suppliers increase quantity supplied- causes an increase in both price and quantity - A decrease in demand leads to a lower price and a smaller quantity- opposite effect- decrease in demand, new equilibrium- reduction in both price and quantity- decreased demand need to lower to price to prevent surplus- leads suppliers to make less- decrease in both price and quantity - Demand shifts lead price and quantity to move in the same direction- both increase or decrease, not true for supply

businesses and demand elasticity

- Price elasticity of demand is critical factor in determining how they set strategy of business- how they use it - Use price elasticity of demand to forecast consequences of change in price - Percent change in quantity demanded= price elasticity of demand x percent change in price- plug numbers into this formula to figure out how quantity demanded will change- allows you to forecast how price changes in demand affect revenues and profits

price elasticity of demand

- Price falls, quantity demanded will rise- but by how much? What makes a difference? How responsive are buyers to prices- figure out how to measure this responsiveness

market demand downward-sloping

- Quantity demanded is higher when price is lower in industries- market demand curves obey the law of demand- follows from understanding of individual demand curves, same principles - Prices change the quantity demanded for both new and old customers- current customers will buy more, new customers will come- lower cost of driving encourages people to buy a car- increased quantity demanded among existing customers and increase in quantity demanded from new customers- consider demands of all potential customers when estimating and not just current customers because they can change

quantity regulations

- Quantity regulation- a minimum or maximum quantity that can be sold- a mandate- a requirement to buy or sell a minimum amount of a good- health insurance, housing- quota- a maximum quantity of a good that can be bought or sold- can be on buyers like marijuana limit that reduces demand but more on sellers- max amount of taxis on road

a tax on buyers

- Store posts price without tax and is paid as check out and store mails out the tax- buyer has statuatory burden- getting a deal without sales tax is actually figure out sales tax and pay with annual tax return- pay that price plus tax at register - A tax on buyers shifts the demand curve- marginal benefit curve, marginal benefit is reduced, decrease in demand, interdependence principle- left or damnd shifting down by the amount of the tax- willing to purchase same quantity at tax amount lower - A tax leads to a decline in the quantity sold- intersects supply at lower quantity- price buyers pay may be above the curve - The tax increases the price buyers pay and decreases the price sellers receive - Buyers and sellers share the economic burden of a tax on buyers- each bear some

rational rule for sellers

- Rational rule for sellers in competitive markets- sell one more unit if the price is greater than or equal to the marginal cost- puts together advice from ¾ principles in one sentence- think at the margin, compare marginal benefit to marginal cost, opportunity cost of expanding production- apply to decisions - Follow this rule to maximize your profits- profit is revenue minus costs, can rise- produce quantity of max profit if you keep supplying when price is at least as high as marginal cost- when equal won't increase/decrease profit- keep selling until price equals marginal cost- raise quantity until point where marginal cost of last gallon is equal to price- keep selling until price/MB=MC- raise quantity as long as price at least as high as MC- keep doing until MB=MC- MB=price- price=MC - Supply curve is also your marginal cost curve- understanding supply about understanding marginal costs- individual supply curve is also marginal cost curve- price equals marginal cost then curve illustrates marginal cost for each gallon of gas - Supply curve reveals your marginal cost- supply curve is also marginal cost curve- can learn about marginal costs by observing its selling patterns- can figure out exactly how much the last unit cost to make- supply is all about marginal costs

elasticity and business strategy

- Recall in PC markets if raise price even by small amount all customers will go to competitor/substitute - If demand for your product is currently inelastic, you should raise your prices- increase revenue, decrease costs because will need to produce a smaller quantity- increase profits - Use your demand elasticity to choose your pricing strategy- elastic go low, inelastic go high - Knowing a market's demand elasticity can help you decide which market to enter- if you think a good is more inelastic than others do and you set higher prices and are right then you make money

determinants of the price elasticity of supply

- Reflects how willing businesses are to increase quantity supplied in response to a higher price- dpeneds on how rapidly marginal costs will rise and how flexible business canbe - Price elasticity of supply is all about flexibility- how easily/cheapily you can mobilize resources to expand production when prices rise and how easily you can cut expenses/repurpose resources when price falls- more flexible, greater elasticity - Supply elasticity factor 1: inventories make supply more elastic- easily stored than can respond quickly to price changes, break link between production and supply - Factor 2: easily available variable inputs make supply elastic- increase production swiftly - Factor 3: extra capacity makes supply elastic- extra space etc - Factor 4: easy entry and exit make supply more elastic- for businesses - Factor 5: over time, supply becomes more elastic- adjustments take time, can make major changes Calculating the Price Elasticity of Supply - Use midpoint formula to calculate percent change in Q and P ratio- divide

price regulations

- Regulate prices directly like above or below a certain amount- price ceiling- a maximum price that sellers can legally charge- price floor- a minimum price that sellers can legally charge

both supply and demand shift

- Same rules hold- add up the effects of both curves shifting- look at each shift separately and then add up effects- ex: decrease in demand lowers price and quantity, decrease in supply lowers quantity but increases price- quantity is going to be lower but price is uncertain/change is unclear- could either rise or fall- when both shift conclusion will often be it depends- depends on which shift had the biggest impact - The effect of two shifts can depend on which curve shifts the most- if demand/supply curve shifts a lot more then price will respond, could be exactly equal - Use the morning-evening method to work out the effects of the two curves shifting: o Increase in demand and increase in supply- P+ Q+, P- Q+- price depends quantity rises o Increase in demand and decrease in supply- P+ Q+ P+ Q- price rises quantity depends o Decrease in demand and increase in supply- P- Q-, P- Q+- price falls quantity depends o Decrease in demand and decrease in supply- P- Q- P+ Q- price depends and quantity falls- Interpreting Market Data - So far predict consquences of changing market- alternative way- diagnose what's happening in economy- rule 1- if prices and quantities move in the same direction, then demand curve has definitely shifted (possible supply shifted)- If prices and quantities move in opposite directions then supply has shifted (possible demand shifted)- - Analyze any competitive market- four core principles for economic analysis- demand side and potential buyers- depends on price summarized in demand curve and market demand curve- supply side of this- depends on price in supply curves and market curves- demand and supply reveal equilibrium price- signal for some to buy and others to sell and determines what gets made, by who, sold

combined shifts in supply

- Sellers current selling plans, if they shift so will curve- a change in price won't shift curve but remember other factors- a shift that increases quantity suppliers plan to sell at each price is an increase in supply and shifts curve to the right- decrease shifts to left- move to new equilibrium - An increase in supply leads to a lower price and a larger quantity- new equilibrium at demand curve- lower price and higher quantity- increase in supply means that they want to sell more at same price but buyers don't demand more- if price didn't change would be a surplus so price lowers- increases demand - A decrease in supply leads to a higher price and a smaller quantity- decrease in supply causes increase in price and decrease in quantity- no change in demand, would be shortage, increases price to fix which has their quantity decrease as they move along curve Supply shifts lead price and quantity to move in opposite directions- different than demand which is same direction

movements along the demand curve

- Shows how market prices shape total quantity among all buyers- to forecast total quantity demanded, locate price and look until you hit the demand curve and then down to the quantity for your answer- can do this for any point- a fall in price will lead to a rise in quantity demanded- when nothing else but price is changing, you will always compare different points along the same demand curve- price changes cause movements along a fixed demand curve- summarizes the entire relationship between price/quantity demanded - A change in price causes a movement along the demand curve, yielding a change in the quantity demanded

supply curve shifts

- So far have held everything constant and used opportunity cost principle, cost-benefit principle, marginal principle- learned how quantity supplied varies with price- bring in interdependence principle- what happens when other than price change

demand shifts

- So far we've analyzed how quantity demanded varies with price of a good with all other things constant- this uses three of the four principles to uncover things like the Rational Rule for Buyers - What happens when things aren't constant- factors other than price change? Need interdependence principle

interdependence principle

- Success depends on all her other decisions, decisions made by others within the market/rivals, developments in other markets, expectations about the future- filled with interdependencies- all choices are interdependent and both shape and are shaped by the choices that you and others make, both now and in the future - Interdependence principle- your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future- when any of these factors changes, your best choice might change- there are four types of interdependencies you'll need to think about: dependencies between each of your individual choices, dependencies between people or businesses in the same market, dependencies between markets, dependencies through time- not just for businesses- choices depend on many other factors

movements along the supply curve

- Summarizes/aggregates behavior of competitiors, across all sellers, forecast quantity- locate the price and then look down to horizontal axis- price change leads to a movement to another point along same curve- movement along the supply curve yielding a change in the quantity supplied

movements along demand curve

- Survey already describes what happens when the price changes so it doesn't need to be changed- individual demand curve will be unchanged, so neither will market demand curve- demand curve is plan for how to respond to different prices, and if buyers' plans haven't shifted, then market demand curve hasn't- assess consequences of price change

market demand

- Take a broader view, analyzing market demand- purchasing decisions of all buyers taken as a whole- assessing total quantity demanded across entire market at each price - Market demand curve- a graph plotting the total quantity of an item demanded by the entire market, at each price

economic burden of taxes

- Tax incidence- who is going to bear the economic burden of the tax- suppliers or buyers? - Tax incidence depends on the price elasticity of demand and supply- ability to avoid taxes- pay less and avoid economic burden- taxes cause prices to change so makes sense related to elasticity - Sellers bear a smaller share of the economic burden when supply is relatively elastic- avoid tax prices by supplying smaller quantity, the more flexibility sellers have to use their resources to do something different, more elastic price elasticity of supply- price sellers receive will decrease by a smaller amount when supply is relatively elastic- inelastic- sellers bear more economic burden and see larger decline in after-tax price- larger the price elasticity the more sellers avoid the economic burden of the tax- so more elastic the curve is the smaller their share of economic burden - Buyers bear a smaller share of economic burden when demand is relatively elastic- avoid by buying fewer, more you reduce more you avoid tax and make sellers pay more- elasticity determined by substitutes- those who switch/more elastic bear less of burden - The factor that is more elastic will have a smaller shareof the economic burden- when price elasticity of demand is higher sellers lower price to keep customers- when price elasticity of supply is larger buyers pay higher prices- whatever factor is more elastic bears less of economic burden of tax- who can get out of way by changing their plans A Four-Step Recipe for Evaluating Taxes - Determine which curve(s) is shifting- any change with buyers/MB is demand and suppliers/MC is supply - Consider whether it is an increase or decrease in txes- typically left/increase - Compare pre-tax equilibrium with post-tax equilibrium- how will prices and quantities change? Price buyer pays and price seller receives including the tax Consider which is more elastic and which bears less of the tax

make better decisions

- That's the economic method boiled down to four core principles- applying them around you - Put the fore core principles to work- here's the recipe o Step 1: first use the marginal principle by breaking "how many" choices down into simpler marginal choices- better off doing more of something or a little bit less o Step 2: apply the cost-benefit principle by assing relevant costs and benefits- need to assess whether marginal benefit exceeds the marginal cost o Step 3: evaluate relevant costs and beenfits, need to apply opportunity cost principle and ask or what- take into account what you give up when you make a choice- relevant opportunity costs o Step 4: interdependence principle helps you understand how changes in other factor might lead to different decision - Apply core principles to make best decision possible- understand and predict decisions of others- put yourself in someone else's shoes- forecast their decisions - Principles in short: o One more? The marginal principle o Does the benefit beat the cost? The cost-benefit principle o Or what? Opportunity cost o What else? Interdependence

measuring responsiveness of demand

- The price elasticity of demand- a measure of how responsive buyers are to price changes. It measures the percent change in quantity demanded that follows from a 1% price change o Price elasticity of demand= %change in quantity demanded/%change in price - Measured by the ratio of the percent change in quantity demanded to the percent change in price as you move along demand curve- take note of the sign- decrease/increase/rise/fall and use those- note that the price elasticity of demand is always a negative number because cutting the price raises the quantity demanded- movements along demand curve, law of demand tells us price and quantity changes always move in opposite direction- when price goes up, quantity demanded goes down, price goes down, quantity demanded goes up - Absolute value focuses on the magnitude of the price elasticity of demand o Want to focus on magnitude, ignore negative, makes it easier to talk about magnitude of the change- larger elasticity means larger percent change in quantity demanded and shallower slope - When quantity is very responsive, demand is elastic o Cut prices, rises a lot- very responsive to shifts- demand is elastic- when the absolute value of the percent change in quantity is larger than the absolute value of the percent change in price, which means absolute value of price elasticity is greater than 1 o Price increases also lead to large changes in the quantity demanded - When quantity is very unresponsive, demand is inelastic o Gas if only driving to work, not very responsive to price changes- demand is inelastic- when the absolute value of the percent change in quantity is smaller than the absolute value of the the percent change in price, which means that the absolute value of the price elasticity is less than 1 o When the absolute value is exactly equal to 1, it is neither elastic nor inelastic- unit elastic- dividing line - Elastic demand curves are relatively flatter than inelastic demand curves o Elastic is relatively flat while inelastic is relatively steep- if they pass through the same point, the demand curve that's flatter at that point is more elastic because quantity demanded is responsive and changing- not the same thing as slope- this is the percent chan

realistic theory of demand

- Thinking through core principles provides useful advice/helpful forecasts- rational rule for buyers is advice for you but understand/predict others too- retailers use diminishing marginal benefit - As buyers experiment, they come to act as if they follow the core principles- maybe don't act exactly but usually buy with higher benefits and lower prices/costs- closer with more experience

choose best quantity to buy

- Thinks of possible uses for each gallon of gas, thinks about the benefits from each use and puts a financial value on how much he is willing to pay (WTP) to obtain these benefits for each additional gallon - Focus on your marginal benefits- think broadly about uses and don't restrict yourself to financial- compare to next best alternative - Think about additional benefit of one more gallon of gas- marginal benefit- compare the marginal benefit you calculated to the cost- compare price of gallon with marginal benefit to make decision- when you figure out demand, compare price with marginal benefit - For your own choices: marginal principle- break how many questions into series of smaller, marginal choices- consider each additional one separately by comparing costs and benefits like how it would be used and the price by the same metric- best choice will depend on cost benefit principle- buy it if benefit exceeds the cost- cost is the price, benefit is marginal benefit- when you evaluate your marginal benefits, you're applying opportunity cost principle- asking, or what- what is the next best option and how much does choosing this one save you?

perfect competition

- Use core principles to guide choice of what quantity to produce at each price Setting Prices in Competitive Markets - Setting prices means understanding the competitive environment- many people producing same product, identical - Perfect competition: o All businesses are selling an identical good o There are many sellers and many buyers, each of whom is small relative to the size of the market - This has implications for price setting o Perfectly competitive firms are price-takers, following the market price- best strategy is to charge price pretty much identical to what competitors are charging- if they charge a little more, they could quickly lose all customers, or setting lower price/undercutting competition for a small company doesn't make money because can still sell more at market price- would only reduce profits o Perfect markets don't spend a lot of time thinking about price because best price is market price- makes them price takers- take the market price as given and just follow along- when you're a buyer in a PC market you're also a price taker because you take the price as given and decide what quantity to buy o Not all markets are perfectly competitive- this chapter will focus on PC/price-takers but doesn't describe most markets because most have some degree of imperfection, handful of buyers/sellers, unique product, loyal fans- not price takers- foundation for understanding since all have competition, then understand imperfect, simplified

production possibility frontier

- Visual your opportunity costs- production possibility frontier (PPF)- maps out different sets of output attainable with your scarce resources- illustrates the trade-offs- opportunitiy costs you confront when deciding how best to allocate scarce resources like time, money, raw imputs, production capacity - Illustrates those alternative inputs and outputs with two extremes and different combinations that form a straight line or curve- line represents the most you can produce given your circumstances- - Can't produce more of one output unless you produce less of another- affect each other- productivity gains shift your PPF outward - The cost-benefit principle and opportunity cost principle together say: you should pursue your choice if it yields benefits that are at least as large as the opportunity cost, which is your next best alternative

calculating opportunity costs

- What happens if you pursue your choice? What happens under your next best alternative?- costs of choice - costs of next best alternative = opportunity cost- pursue only if benefit exceeds total opportunity cost - Some out-of-pocket costs are opportunity costs but not all opportunity costs are financial- not all costs are opportunity costs- ex- room and board- you have to pay for that whether or not you get the degree- if expense is the same and you have to pay for it under either alternative then not an opportunity cost- count the different if there is one- some nonfinancial costs are not opportunity cost if same/less than what it is everyday The "Or What?" Trick - To apply opportunity cost principle make sure each question has OR- forces you to consider alternatives- if more than one, consider the best one, which will be unique to you

other demand elasticities

- What happens when price of other goods changes or when income changes- interdependence principle- measure responsiveness of quantity demanded to other factors

sunk costs

- When the time, effort, and other costs you put into the project cannot be reversed, they are referred to as sunk costs- decision makers ignore sunk costs- the opportunity cost principle asks you to compare consequences of choice with consequences of next best alternative- cannot be reversed and will be there either scenario so not opportunity cost- ignore anything from the past, even near past

dependency over time

- When to buy, when to bring to market, when to invest, hire, work- trade-off across time- when to act- investments, especially in time, can expand or limit choices - Ask what else might my decision affect/affect my decision

when to use marginal principle

- When you have to decide how many of something to choose, you should use marginal principle to break decision into series of smaller marginal choices- isn't always relevant, but some either/or choices have how many questions inside- you know you have broken a decision into its smallest components when you are left with only either/or choices to make- then apply other two principles - Keep asking until the answer is no

statutory burden and tax incidence

- Whether tax is levied on buyers or sellers it has the same economic effect- numbers are identical- exact same effect- it doesn't matter whether government puts tax on buyers or sellers- end result is exactly the same- all taxes - It doesn't matter who puts the money into the tax jar- just final step is different/who submits tax- statuatory burden does not affect economic burden

determinants of the price elasticity of demand

- Why are some elastic and some inelastic- opportunity cost principles means to figure out benefit must compare to next best alternative- next best alternative- the extent to which there are good substitutes available for the next marginal purchase - Elasticity is all about substitutability o No alternative way to do something/choice- marginal benefit is very high and will have to continue to buy- marginal benefit for one that gets him home from work is high but for next one that's for weekend fun is low so unlikely to change quantity demanded at all- very inelastic- when you are close to indifferent small differences in price make big difference so elastic- availability of substitutes determines elasticity - Demand elasticity factor 1- more competing products mean greater elasticity- more likely to find substiture so more price sensitive when substitutes are really close- think broadly about substitutes - Specific brands tend to have more elastic demand than categories of goods- have more close substitutes - Necessities have less elastic demand- no good substitute available and doing without it isn't a good option- food, food staples but not restaurant meals- necessity can change per person and over time - Consumer search makes demand more elastic- look for alternative and find lower priced good more elastic - Demand gets more elastic over time- diminishing marginal benefit, can figure out alternatives and solutions that make you more elastic over time- time passes you tend to have more options - Elasticity will differ by person, product, price- substitutes, depends on what you like and how much you like it- who you are, product, price, quickly you need to respond

a tax on sellers

- You pay price posted and portion of that goes to government - A tax on sellers shifts the supply curve- a marginal cost because additional cost they must pay for each unit they sell- interdependence principle- supply curve shifts- shift to the left or up the increase in marginal costs- if marginal costs are 30 dollars higher must shift up 30 dollars - Tax leads to a decline in quantity sold- new curve intersects demand curve at lower quantity demanded, quantity of soda declines because each bottle costs more - Tax increases price buyers pay and decreases price sellers receive- give some to government - Both buyers are sellers bear the economic burden of the tax on sellers- distinction between who is assigned to send tax payment and who bears economic burden - Statutory burden- the burden of being assigned by the government to send a tax payment - Who experiences a greater loss as a result of the tax- economic burden- the burden created by the change in after-tax prices faced by buyers and sellers - Share the economic burden of tax- estimate about 2/3 of tax on soda falls on consumers - Tax incidence- the division of the economic burden of a tax between buyers and sellers

rational rule

- if something is worth doing, keep doing it until your marginal benefits equal your marginal costs- analyze a series of simpler either/or choices- stop hiring just before the marginal cost becomes larger than the marginal benefit- most cases this crossing point occurs right when the marginal benefit is equal to the marginal cost- keep going until equals marginal cost- helps you maximize economic surplus- always hire an additional worker when marginal benefit is greater, will increase economic surplus and move it towards its highest level- if cost is higher it will lower economic surplus- maximize surplus right at point where marginal cost of hiring last worker equals marginal benefit- total revenue=total benefit- marginal benefit from hiring three workers is total benefit from three minus two workers- just stop hiring before costs become greater- creates a structure to simplify complicated questions

shifts along vs shifts in demand curve

Shifts along veruss shifts in curve but is important- if the only thing that's changing is the price, then it's movement along the demand curve, but if other market conditions change, you need to think about shifts of demand curve

elasticity and revenue

Total revenue- the total amount you receive from buyers which is calculated as price x quantity - Price times quantity - Revenue on a graph is a rectangle created by price times quantity- change in price leads to change in quantity demanded in opposite direction, impact on total revenue will depend on relative magnitude of two changes- price elasticity of demand tells you whether percent change in price is larger than the percent change in quantity demanded (elastic or inelastic)- in reality many markets are not perfectly competitive- business is operating in imperfect market delicate balancing act- higher price get bit more revenue but sell fewer items- lower and sell more but less for each- not in PC best pricing strategy will depend on elasticity of demand- for product - Higher prices lead to less total revenue is demand is elastic- if responsive to changes a modest price increase will lead to large decline in quantity demanded, fewer customers, revenue lower- percent rise in price is smaller than percent decline in quantity demanded- demand is elastic- price increase will lead to decline in total revenue- absolute value of change in quantity greater than price - Higher prices lead to more total revenue if demand is inelastic- don't respond to changes as much then increase means total revenue will be higher- percent rise in price is larger than decline in quantity, inelastic, revenue will increase- absolute value of percent change in quantity demanded is less than absolute value of price

price floors

When Regulation Forces Higher Prices - Sets a minimum price that can be charged for good- when set below, doesn't have any effect/nonbinding- when a price floor prevents the market from reaching the equilibrium price because the lowest price that sellers can charge is set above the equilibrium price, this is binding price floor- trying to help sellers get a higher price, minimum wage, reduce quantity sold like alcohol- it raises prices and lowers quantity - Reduce the quantity of alcohol consumed by setting a minimum price- risks for society, price floors discourage bad behavior- is the regulation binding, quantity demanded is less than quantity supplied- creates a surplus- what happens to surplus- in PC market sellers can sell all they want but binding price floors means that's not true- sellers won't find buyers- sell on illegal market, fighting over shares or exiting market, unemployment- surplus of workers from price floor of minimum wage- surplus is gap

price ceilings

When Regulation Forces Lower Prices - Rent is too high, housing, upper limit, when price ceilings are above the equilibrium price they don't have any effect- when a price ceiling prevents the market from reaching equilibrium price because the highest price that sellers can charge is set below the equilibrium price, economists refer to it as a binding price ceiling - Price ceilings lower prices, but cause shortages- price ceiling below equilibrium price- at this price how many will be supplied versus how many will be demanded- different numbers, difference between quantity demanded and quantity supplied is a shortage- hurts because in disequilibrium, missing out on trades, benefits those who get the cheaper houses - There are unintended consequences of price controls- might not keep in good condition if can't raise price for it, changes who gets it might be arbitrary or discriminatory or bribes, too much time searching, black market - Price ceilings lead to shortages in many markets- shortages and queing, search costs, finder fees, bribes, illegal market may raise price anyway, usury laws that prevent too high interest, taxi fares, ceilings on food/toiletries, drugs

demand shift income

o All of individual choices are interdependent since you only have limited income to spend- spend on one thing, can't spend on another, but when income is higher, you can afford to buy a larger quantity of both- at each and every price level, you can buy a larger quantity of both, causing demand curve to shift right- an increase in demand- if income falls, you would buy less at each and every price, shifting curve to the left or a decrease in demand o If your demand for a good or service increases when your income is higher, we call it a normal good- most goods are normal goods- examples- housing, clothes, entertainment than when income is lower o Demand decreases when income rises for some goods- these are inferior goods- a good for which higher income causes a decrease in demand- doesn't refer to the quality of good/people who buy them but describes good for which demand decreases as income increases- taking the bus since you could get a car o A purchase you're excited to make with a pay raise is normal- if there's anything you'll stop buying once this happens it's an inferior good for you- designer brands would be normal, modestly priced would be inferior- ex rising income leads to more purchases at Target and less at Walmart during recession- bad times for economy are good times for Walmart

supply shift other opportunities (price of related outputs)

o Connections between markets- many different lines of business you could engage in- alternative products can shift original product to left o When price increase of one good decreases your supply of another we call them substitutes-in-production- arises when can use resources to produce alternative goods- this is opportunity cost principle because raises opportunity cost of producing it if something else is more profitable- would cause it to decrease supply of that product o Complements-in-production- usually produced together, byproduct like asphalt and gasoline- things made together from same process- your supply of a good will increase if the price of a complement-in-production rises- both increase- extra revenues lowering marginal cost and shift curve to the right- complements with demand are very different- produce together and consume together are different o Supply will increase if price of goods that are substitutes-in-production fall or prices of complements in production rise and the opposite

demand shift price of related goods

o Interdependent across different goods, related- hotdogs and buns, higher cost of buns decreases demand for hotdogs and shift to left- when the higher price of one good decreases your demand for another good, we call them complementary goods o Complementary goods- goods that go together. Your demand for a good will decrease if the price of a complementary good rises and will increase if the price of a complementary good falls- items used together for same purpose o Substitute goods- goods that replace each other- your demand for a good will increase if the price of a substitute good rises, and it will fall if the price of a substitute good falls- walking, cycling, ride-sharing, catching bus and driving- used not together for same purpose- parents might buy complements to studying and not substitutes to encourage it, new workout clothes and no junk food

supply shift expectations

o Linked through time, if you expect price of product to rise next year you can increase profits by storing and selling them- decrease supply this year and shift left but increase it next year/right- application of opportunity cost principle as opportunity cost of selling this year is selling next year- matters only for goods that can be stored for later use- produce for this year can be different from selling if storeable- if this is long term it will buy more equipment and hire more workers- expanding supply long term

supply shift type and number of sellers

o New sellers enter market- supply needs to be added to market supply- increase quantity at each price so to the right- if they leave then left- driven by expected future profits so any factor that changes expected future profits will change number of suppliers and shift curve o Type of sellers- if sellers change so will curve, different types of businesses o Only impacts market supply curve - When things other than price change, your supply curve may shift- anything that shifts marginal costs shifts your curve, change marginal costs- inputs and productivity change costs directly, alternative outputs and expectations shift costs by changing the opportunity cost- all shift market supply curve- increase in marginal costs leads to decrease in supply/left

supply shift productivity and technology

o Productivity growth- producing more output with fewer input- key force in reducing marginal costs through time- supply curve=marginal cost curve- leads to increase in supply and shift to right o Less materials/workers to make same amount, technology generally always lowers costs and shifts right- technological change drives productivity growth, invention of new machines, processes, management techniques- interdependence principle is important because change in one industry is often due to another industry- internet first developed for something else and affects all industries, may also reflect investments in research and development- productivity also rises through learning by doing over time- become more efficient and shift right

demand shift type and number of buyers

o Size or composition of market changes through demographic composition or type of buyers in market, then market demand will also change o Shaped by number of buyers- potential buyers rises, more individual demand curves to add up, shifts curve to the right, increases in population over a long time, explains why business owners favor increased immigration- increased demand- baby boom after WW2 increased different demands as these kids aged, international trade and opening of new foreign markets could increase demand o When things other than price change, your demand curve may shift- changes in market conditions affect demand decisions, interdependence, factors change best choice might change- change your or market's marginal benefit

demand shift expectations

o Thinking ahead- choose what and when to buy it, linked through time, save money and shift demand curves- think that price will lower soon you would decrease today's demand for gas and the opposite- expectations about future prices- also logic of substitutes- tomorrow is substitute for today and higher price for substitute increases demand for it today

demand shift congestion and network effects

o Usefulness of some products and demand is shaped by others' choices- social media in US vs WeChat in China- network effect- when a good becomes more useful because other people use it- if more people buy a good, your demand for it also increases- greater marginal benefits/increased demand- business implications- show people like it from the beginning and being most successful early on, speaking English o Congestion effect- when a good becomes less valuable because other people use it- if more people buy such a product, your demand for it will decrease- driving one a road, formal dress