Unit 2 (Chapter 4 and 5) Econ Notes
elastic demand
if the percentage change in the quantity demanded exceeds the percentage change in price (IS sensitive to a change in price)
inelastic demand
if the percentage change in the quantity demanded is less than the percentage change in price (IS NOT very sensitive to change in price)
elastic supply
if the percentage change in the quantity supplied exceeds the percentage change in the price (IS sensitive to a change in price)
inelastic supply
if the percentage change in the quantity supplied is less than the percentage change in price (IS NOT very sensitive to a change in price)
Inputs
- Resources and input prices influence the cost of production - The more it costs to produce a good, the *smaller is the quantity supplied of that good*.
Increase in demand and decrease in supply...
- Raises the equilibrium price - The change in the equilibrium quantity is ambiguous because the : -- Increase in demand increases the quantity -- Decrease in supply decreases the quantity
Influences on the price elasticity of the demand fall into:
- Availability of substitutes - Proportion of income spent
Decrease in both demand and supply...
- Decreases the equilibrium quantity - The change in the equilibrium price is ambiguous because the: -- Decrease in demand lowers the price -- Decrease in supply raises the price
Increase in both demand and supply...
- Increases the equilibrium quantity. - The change in the equilibrium price is ambiguous because the: -- Increase in demand raises the price. -- Increase in supply lowers the price.
The two main influences on the price elasticity of supply are:
- Production possibilities (time since price change) - Storage possibilities
When the supply changes...
- The demand curve does not shift. - But there is a change in the quantity demanded. - Equilibrium price changes in the opposite direction to the change in supply. - Equilibrium quantity changes in the same direction as the change in supply. Example: Event: European water bottlers buy springs and open plants in the United States. In the market for bottled water: 1. With more suppliers of bottled water, supply changes. 2. The supply of bottled water increases and the supply curve shifts rightward. 3. Quantity demanded increases along the demand curve. 4. Equilibrium quantity increases.
When the demand changes...
- The supply curve does not shift. - But there is a change in the quantity supplied. - Equilibrium price and equilibrium quantity change in the same direction as the change in demand. Example: Event: A new zero-calorie sports drink is invented. In the market for bottled water: 1. The new drink is a substitute for bottled water, so the demand for bottled water changes. 2. The demand for bottled water decreases and the demand curve shifts leftward. 3. Quantity supplied decreases along the supply curve. 4. Equilibrium quantity decreases.
*4.2*
...
*4.3*
...
*5.2*
...
Related Goods
A change in the price of one good can bring a change in the supply of another good substitute in production: a good that can be produced in place of another good - The supply of a good *increases* if the price of one of its substitutes in production *falls*. - The supply of a good *decreases* if the price of one of its substitutes in production *rises*. -- ie: truck and SUV in an auto factory complement in production: a good that is produced along with another good - The supply of a good *increases* if the price of one of its complements in production *rises*. - The supply of a good *decreases* if the price of one of its complements in production *falls*. -- ie: skim milk and cream
If a demand is elastic...
A given percentage rise in price brings a *larger* percentage decrease in the quantity demanded. - Total revenue decreases
If a demand is inelastic...
A given percentage rise in price brings a smaller percentage decrease in the quantity demanded. - Total revenue increases
Expectations
A rise in the expected future price of a good *increases* the current demand for that good. A fall in the expected future price of a good *decreases* the current demand for that good. For example: if the price of a computer is expected to fall next month, the demand for computers today decreases.
Expectations (supply)
Expectations about future prices in influence supply Expectations of future prices of resources also influenced supply
High taxes...
High taxes: on cigarettes and alcohol limit the number of young people who become habitual users of these products. High taxes: have only a modest effect on the quantities consumed by established users. Similarly: effective policing of important of an illegal drug that limits its supply leads to a large price rise and a substantial decrease in the number of new users but only a small decrease in the quantity consumed by addicts.
Total Revenue Test
If price and total revenue change in the opposite directions, demand is elastic. If a price change leaves total revenue unchanged, demand is unit elastic. If price and total revenue change in the same direction, demand is inelastic.
Distinction vs. change in supply and change in quantity supplied
If the price... *falls* when other things remain the same, *the quantity supplied decreases* and there is *movement down along the supply curve*. If the price *rises* when other things remain the same, the *quantity supplied increases* and there is a movement up along the supply curve So=0. If any influence... other than the price, there is a *change in the supply*. When the supply *decreases*, the *supply curve shifts leftward*. When the supply *increases*, the *supply curve shifts rightward*.
Income
Normal good: a good for which the demand increases if income increases and demand decreases if income decreases Inferior good: a good for which the demand decreases if income increases and demand increases if income decreases
The Law of Supply
Other things remaining the same, If the price of a good rises, the quantity supplied of that good increases If the price of a good falls, the quantity supplied of that good decreases
The Law of Demand
Other things remaining the same... If the price of the good rises, the quantity demanded of that good decreases If the price of the good falls, the quantity demanded of that good increases
Main influences on demand are...
PINTE prices of related goods, income, number of buyers, tastes, and expectations
Main influences on supply are...
RIPEN related goods, inputs, productivity, expectations, number of sellers
Law of Market Forces
Shortage = price rises Surplus = price falls
*4.1*
https://docs.google.com/presentation/d/1ALJj_7q07ndNodmG-2mHmi16wlRiVAvEpcyvCxQOnVE/edit#slide=id.p100
The demand for a good is elastic if... The demand for a good is inelastic if...
The demand for a good is elastic if... a substitute for it is easy to find. The demand for a good is inelastic if... a substitute for it is hard to find.
Number of Buyers
The greater the number of buyers in a market... the larger is the demand for any good
Number of Sellers
The greater the number of sellers in a market the larger is the supply
In the market for timber beams, the price of a timber beam falls. Explain the effect of this event on the quantity of timber beams supplied and on the supply of timber beams.
The quantity of timber beams supplied decreases and the supply of timber beams is unchanged
Tastes
When tastes change, the demand for one item increases, while the demand for another decreases. Preferences change when: - People become better informed - New goods become available
change in the quantity demanded
a change in the quantity of a good that people plan to buy that results from a change in the price of the good
change in quantity supplied
a change in the quantity of a good that suppliers plan to sell that results from a change in the price of the good
change in demand
a change in the quantity that people plan to buy when any influence other than the price of the good changes
change in supply
a change in the quantity that suppliers plan to sell when any influence on selling plans other than the price of the good changes
demand curve
a graph of the relationship between the quantity demanded of a good and its price when all other influences on buying plans remain the same
supply curve
a graph of the relationship between the quantity supplied and the price of the good when all other influences on selling plans remain the same
demand schedule
a list of the quantities demanded at each different price when all the other influences on buying plans remain the same
supply schedule
a list of the quantities supplied at each different price when all other influences on selling plans remain the same
total revenue test
a method of estimating the price elasticity of demand by observing the change in total revenue that results from a price change
A market might be a _____ or _____
a physical place or a group of buyers and sellers spread around the world who never meet
Which of the following statements describes a change in the quantity supplied and which describes a change in supply? I. Farms are selling less chicken because the price of turkey has increased. II. Farms are selling less chicken because the price of chicken has fallen. III. Farms are selling more chicken because the price of chicken has risen. IV. Farms are selling more chicken because the cost of chicken feed has fallen. a. I and IV are changes in supply and II and III are changes in the quantity supplied. b. I, II, and III are changes in supply and IV is a change in the quantity supplied. c. I is a change in the quantity supplied and II, III, and IV are changes in supply. d. I, II, and III are changes in the quantity supplied and IV is a change in supply
a. I and IV are changes in supply and II and III are changes in the quantity supplied.
A supply schedule is a list of the ______ at each different price when all other influences on selling plans remain the same. A supply curve is a graph of _____ . a. quantities supplied; a supply schedule b. quantities supplied; quantities supplied c. quantities actually sold; quantities supplied d quantities actually sold; a supply schedule
a. quantities supplied; a supply schedule
*5.1*
https://docs.google.com/presentation/d/1Isoy97KQmr83anZgFcTcqHPmFVdVOGGP7Vgs4KhV5ns/edit#slide=id.p88
The quantity demanded is...
an amount per unit of time (example: the amount per day or per month)
market
any arrangement that brings buyers and sellers together
Aqua Springs makes the following four statements about bottled spring water. Which statement best describes the firm's quantity supplied in the bottled water market? a. We would sell more water if the demand for it were greater. b. At a price of $1 gallon, we plan to sell 2,000 gallons per day. c. If we could get a higher price, we'd bottle more water. d. We'll switch from plain water to flavored water is flavored is more profitable.
b. At a price of $1 gallon, we plan to sell 2,000 gallons per day.
Which of the following statements by Aqua Springs demonstrates that the firm's selling plans obey the law of supply? a. We've been hit by a rise in the price of plastic bottles and will lower production. b. We can easily decrease the production of plain water and increase the production of flavored water. c. If the price of bottled water falls and all the other influences on our selling plans remain the same, we will cut back on production and lay off some workers d. At a price of $1 gallon, we plan to sell 2,000 gallons per day.
c. If the price of bottled water falls and all the other influences on our selling plans remain the same, we will cut back on production and lay off some workers
A substitute in production is a good that is _____ another good, and a complement in production is a good that is _____ another good. a. consumed in place of; produced together with b. produced in place of; consumed with c. produced in place of; produced together with d. produced together with; produced in place of
c. produced in place of; produced together with
A price rise, like a decrease in income, means that people...
cannot afford to buy the same quantities
At market equilibrium, buyers' and sellers' plans are _____.
consistent
Which of the following events in the market for timber beams illustrates the law of supply? 1. The wage rate of sawmill workers rises. 2. The price of sawdust rises. 3. The price of a timber beam rises. 4. The price of a timber beam is expected to rise next year. 5. Environmentalists convince Congress to introduce a new law that reduces the amount of forest that can be cut for timber products. 6. A new technology lowers the cost of producing timber beams. a. Event #1 only b. Events #2, #3, and #4 c. Events #4, #5, and #6 d. Event #3 only e. All 6 events
d. Event #3 only
Supply is _____, when all other influences on buying plans remain the same. a. the is the quantity of a good that producers would be willing to sell if costs were lower b. the quantity of a good that producers plan to sell c. the relationship between the quantity supplied of a good and the cost of labor used to produce it d. the relationship between the quantity supplied of a good and the price of the good
d. the relationship between the quantity supplied of a good and the price of the good
The greater the proportion of income spent on a good, the more _____ for the is the demand for the good.
elastic - Inelastic: toothpaste takes a tiny proportion of your budget and housing takes a large proportion. If the price of toothpaste doubles, you buy almost as much toothpaste is before. Your demand for toothpaste is inelastic. - Elastic: if your apartment rent doubles, you shriek and look for more roommates; your demand for housing is more elastic than is your demand for toothpaste.
As time passes after a price change, producers find it easier to change their production plans, so supply becomes more _____.
elastic - ie: Fruits and vegetables - it is difficult or perhaps impossible to change the quantity supplied immediately after a price change. These goods have a perfectly inelastic supply on the day of a price change. The quantities supplied depend on crop-planting decisions that were made earlier. In the case of oranges, planting decisions have to be made many years in advance of the crop being made.
The demand for a narrowly defined good is _____.
elastic - ie: The demand for Starbucks is elastic because a Panera latte is a good substitute for a Starbucks latte.
Good that can be: produced at a constant (or very gently rising) opportunity cost have an _____ supply.
elastic - ie: The silicon in your computer chips - it is extracted from sand at a tiny and almost constant opportunity cost, so the supply of silicon is perfectly elastic.
The longer the time elapsed since the price change, the more _____ is the demand for the good.
elastic - ie: when the price of gas increased steeply during the 1970s and 1980s, the quantity of gas demanded didn't change much because many people owned gas-guzzling cars - the demand for gas was inelastic. Eventually, fuel-efficient cars replaced gas guzzlers and the quantity of gas demanded decreases - the demand for gas became more elastic.
Nonuser's demand for addictive substances is...
elastic So: A moderately higher price will lead to a substantially smaller number of people trying a drug.
A luxury has many substitutes, so the demand for a luxury is _____.
elastic - ie: Exotic vacations are luxuries.
Existing users' demand for addictive substances is...
elastic So: even a substantial price rise brings only a modest decrease in the quantity demanded.
competitive market
has so many buyers and sellers that no individual buyer or seller can influence the price
The supply of a storable good is _____.
highly elastic
When demand increases, the demand curve moves ____, and when demand decreases, the demand curve moves _____.
increase = moves right; decreases = moves left
When supply increases, the supply curve moves ____, and when supply decreases, the supply curve moves _____.
increases = right; decreases = left
Good that can be produced in only a fixed quantity have a perfectly _____ supply.
inelastic - ie: A beachfront home in Malibu can be built only on a unique beachfront lot, so the supply of these homes is perfectly inelastic.
A necessity has poor substitutes, so the demand for a necessity is _____.
inelastic - ie: Food is a necessity.
The demand for a broadly defined good is _____.
inelastic - ie: The demand for coffee is inelastic because tea is a poor substitute for coffee.
price elasticity of demand
is a measure of the extent to which the quantity demanded of a good changes when the price of the good changes
price elasticity of supply
is a measure of the extent to which the quantity supplied of a good changes when the price of the good changes
equilibrium quantity
is the quantity bought and sold at the equilibrium price.
The cost of storage is the...
main influence on the elasticity of supply of a storable good - Elastic: Rose growers in Colombia, anticipating a surge in demand on Valentine's Day in February, hold back supplies in late January and early February and increase their inventories of roses. They then release roses from inventory for Valentine's Day. - Inelastic: Fresh strawberries must be sold before they deteriorate, so their supply is inelastic.
A change in demand means that there is a...
new demand schedule and a new demand curve
market equilibrium
occurs when the quantity demanded equals the quantity supplied.
shortage
occurs when the quantity demanded exceeds the quantity supplied - Price rises until the shortage is eliminated and the market is in equilibrium.
surplus
occurs when the quantity supplied exceeds the quantity demanded. - Price falls until the surplus is eliminated and the market is in equilibrium.
Productivity
productivity: output per unit of input - *Increase* in productivity *lowers* cost and *increases* supply. -- ie: an advance in technology increases supply - *Decrease* in productivity *raises* cost and *decreases* supply. -- ie: a severe hurricane decreases supply
Prices of Related Goods
substitute: a good that can be consumed in place of another (apples and oranges) - The demand for a good *rises* if the price of one its its substitutes *rises*. - The demand for a good *decreases* if the price of one of its substitutes *decreases*. complement: a good that is consumed with another good (ice cream and fudge) - The demand for a good *increases* if the price of one of its complements *falls*. - The demand for a good *decreases* if the price of one of its complements *rises*.
quantity demanded
the amount of a good, service, or resource that people are willing and able to buy during a specified period at a specified price
quantity supplied
the amount of a good, service, or resource that people are willing and able to sell during a specified period at a specified price
total revenue
the amount spent on a good and received by its sellers and equals the price of the good multiplied by the quantity of the good sold
The market demand curve is...
the horizontal sum of the demand curves of all buyers in the market
The market supply curve is...
the horizontal sum of the supply curves of all the sellers in the market
equilibrium price
the price at which the quantity demanded equals the quantity supplied.
demand
the relationship between the quantity demanded and the price of a good when all other influences on buying plans remain the same
supply
the relationship between the quantity supplied of a good and the price of the good when all other influences on selling plans remain the same
market demand
the sum of the demands of all the buyers in a market
market supply
the sum of the supplies of all sellers in a market
A change in supply means that...
there's a new supply schedule and a new supply curve