Econ 302 Lesson 2

Inferior Good

A good that when consumers get richer demand contracts and when consumers get poorer demand expands

Normal Good

A good that when consumers get richer demand expands and when consumers get poorer demand contracts.

Complements

A good that when the price of Good A increases the demand for Good B contracts and when the price of Good A falls the demand for Good B expands

Substitutes

A good that when the price of Good Y increases the demand for Good Z expands and when the price of Good Y falls the demand for Good Z contracts

Change in Demand

A rightward or leftward shift of the entire demand curve; caused by a change in something other than the price of the good

Multivariable Demand Function

Mathematical relationship between quantity demanded and the several variables that can affect it

Multivariable Supply Function

Mathematical relationship between quantity supplied and the several variables that can affect it

Inverse Supply Function

Mathematical relationship where price is a function of quantity supplied

Demand Function

Mathematical relationship where quantity demanded is a function of price

Supply Function

Mathematical relationship where quantity supplied is a function of price

Isoelastic Demand Curve

demand curve with a constant own-price elasticity

Expansion in Supply

rightward shift in supply curve

Comparative Statics

the economic analysis where you compare the original market equilibrium to the equilibrium that exists after some change in the market has occurred

Perfectly Elastic

even a tiny change in price will bring about an infinite change in quantity demanded; e=infinity

Contraction in Supply

leftward shift in supply curve

Goods that are more elastic have

many good substitutes; longer times for consumers to adjust their behavior; larger shares of the consumer's budget

Inelastic

percentage change in quantity is smaller than the percentage change in price 0<e<1

Elastic

percentage change of price has brought about a larger percent change in quantity; 1<e<infinity

Unit Elastic

percentage change of price has brought about an equal percent change in quantity; e=1

Ceteris Paribus Conditions of Demand

Income, prices of related goods, and everything else must all be held constant when changing the price of a good in a demand curve. If one of those things changes, you must redraw the demand curve as a response

Ceteris Paribus Conditions of Supply

Input prices, production technology, everything else: producer expectations, number of sellers

Ceteris Paribus

Latin phrase meaning "all else constant"

Contraction of Demand

Leftward shift of the demand curve

Law of Supply

1. There is a positive relationship between the price and quantity supplied. 2. An increase in price will cause an increase in quantity supplied ceteris paribus. A decrease in price will cause a decrease in quantity supplied ceteris paribus

Law of Demand

1. There is an inverse relationship between price and quantity demanded. 2. An increase in price will decrease quantity demanded ceteris paribus. A decrease in price will increase quantity demanded ceteris paribus

Shortage

occurs when quantity demanded is greater than quantity supplied

Surplus

occurs when quantity supplied is greater than quantity demanded

Demand Changes from changes in Number of Consumers

At any given price, if the size of the population of consumers grows, then the demand will expand. At any given price, if the size of population of consumers falls, then the demand will contract.

Demand Changes from changes in Consumer Expectations

If the Future Price of a good is expected to be higher than previously thought, then the demand today will expand. If the Future Price of a good is expected to be lower than previously thought, then the demand today will contract

Expenditures and Revenues

P*Q

Expansion of Demand

Rightward shift of the demand curve

Inverse Demand Function

The mathematical function where price is a function of quantity demanded

Choke Price

The price at which quantity demanded is equal to zero. The constant is an inverse linear demand curve

Change in Supply

a rightward or leftward shift of the entire supply curve

Elasticity

a measure of responsiveness of one variable to a change in one of its determinants

Income Elasticity

a measure of responsiveness of quantity demanded of good X to a change in the incomes of consumers; positive sign implies normal good and a negative sign implies inferior good

Own-Price Elasticity of Demand

a measure of responsiveness of quantity demanded of good X to a change in the price of good X

Cross-Price Elasticity

a measure of responsiveness of quantity demanded of good X to a change in the price of good Y; negative sign will imply complements and a positive sign implies substitutes

Own-Price Elasticity of Supply

a measure of responsiveness of quantity supplied of good X to a change in the price of good X

Price Gouging

a pejorative term for when suppliers raise price above what is deemed "fair"

Speculation

buying and selling of goods today based on predictions of future market conditions; this buying and selling today can cause prices to change

Perfectly Inelastic

change in price has no effect on quantity demanded or supplied; e=0

Market-Clearing Price

price at which quantity demanded is equal to quantity supplied

Input Price

the price of a good that is used in the production of something else; when an input price into the production of good X goes up, the supply of good X contracts; when an input price into the production of good X goes down, the supply of good X expands

Equilibrium

when there is no incentive to change behavior