Econ test 2
neutral goods
a good for which the demand does not change as income rises or falls. If income increases or decreases, demand for neutral good stays the same. Ex: necessities, gas, electricity,
3 steps to analyzing changes in equilibrium
- How will a change in Supply or Demand affect Equilibrium price and Equilibrium quantity (P^E +Q^E) 1. Determine whether the supply curve shifts, the demand curve shifts, or both shift. (Both curves shift ONLY if 2 events occur at the same time. 1 event will not shift both curves) 2. Decide in which direction the curve shifts. 3. Use a supply/demand graph to see how the shift changes equilibrium price and quantity.
calculating CPI
= (cost of Market Basket in Current Year/ cost of basket in Market basket base year)* 100
number of sellers
An increase in the number of sellers of a good will increase the market supply of that good.- Shifts Supply curve right. A decrease in the number of sellers of a good will decrease the market supply of that good. - Shifts supply curve left. Example: Pizza Hut goes bankrupt and closes all stores. How will this affect the supply of pizza? (shift supply curve left)
changes in equilibrium
Equilibrium price and quantity are determined by supply and demand. Whenever demand changes, supply changes, or both change, equilibrium price and quantity change.
demand equation
Example of a demand equation: QD = 1,500 − 32P (Price) For every $1 increase in Price, Quantity demand decreases by 32 units 1. The demand equation illustrates the Law of Demand. - P increases, quantity demanded decreases, Quantity demand increases, ceteris paribus 2. We can use the demand equation to find the quantity demanded at different prices. ex: P=$1, QD=1500-32($1) =1468 units P=$2, QD=1500-32($2) =1436 units P=$10, QD=1500-32($10) =1180 units
Prices of relevant resources or inputs
Examples: -wages(price of labor), prices of raw materials (oil, lumber, flour....). If the price of an input in the production of a good decreases, selling the good is more profitable. - costs decrease, selling more profitable and attractive, so supply increases (shift right) If the price of an input in the production of a good increases, selling the good is more costly and less profitable. - supply decreases (shift left) Example: The price of grapes increases. How will this affect the supply of wine? - grapes are an input in the production of wine (shift supply left)
Macro policies
Fiscal-policies regarding government spending and taxation. Monetary- policies regarding the money supply -affects interest rates, unemployment, growth, inflation
Examples of macro problems
High inflation rate, high unemployment rate, high interest rates, low economic growth or stagnation- macroeconomics try to find (1) causes of each problem and (2) solutions
government subsidies and taxes
If a government subsidizes production by paying the producer some amount for each unit produced, costs to the producer are lowed, and supply is increased. (Common in agricultural commodities.) A government may adjust taxes that producers must pay, which also affects their costs. - An increase in taxes, raises costs, so supply decreases - A decrease in taxes, lowers costs, so supply increases Example: Suppose the government lowers taxes for automobile producers- Lowers cost and increase supply. Shift supply of automobiles to the right
number of buyers
If there are more buyers, demand will be higher; if there are fewer buyers, demand will be lower
import quotas
Import quotas- quantitative restriction on foreign goods -Ex: Suppose Canada restricts the amount of U.S. produced cars that can be sold in Canada. -Decrease supply of U.S. cars (shift left)
Macro theories
Macroeconomists build theories to try to understand macroeconomic problems. 2. Theories exist to explain: causes of inflation, changes in prices, income levels, determinants of interest rates, changes in unemployment, differences in economic growth rates, output of goods and services,... 3. Not all economists agree on the same theories—often several theories exist to try to explain a problem.
different views on how economy works
Not all macroeconomists agree on how the economy works. There are two main schools of macroeconomic thought: (1.) The economy is inherently stable and self-regulating. The economy does not need government intervention. (2) The economy is inherently unstable and requires intervention to correct problems. The economy needs government intervention
preferences
People's tastes and preferences affect the amount of a good they are willing to buy at a particular price. Ex: weather, trends, team success, companies doing things that people like (social responsibilities), can be negative also (Example: The Royals win the World Series. How will this affect the demand for Royals apparel? )
factors that shift supply curve
Prices of relevant resources or inputs, Technology, Prices of other goods, Number of sellers, Seller expectations, Government subsidies and taxes, Government restrictions. - Anything that increases production/selling costs will decrease supply; anything that decreases production/selling costs will increase supply!
supply equation
QS = 1,200 + 43P (for every $1 increase in Price, QS increases by 43 units) 1. The supply equation illustrates the Law of Supply. - Price increase, Quantity supply increases and price decreases, QS decreases, ceteris paribus 2. We can use the supply equation to find the quantity supplied at different prices. - P= $1: QS=1200+43($1)=1243 units - P= $2: QS=1200+43($2)= 1286 units - P= S5: QS=1200+43($5)=1415 units
seller expectations
Sellers may change the amount they are willing to sell today based on what they expect to happen in the future. - If a firm expects the price of the good it sells to decrease in the near future, the firm may increase supply now to sell more at the higher price. - Supply increases (Shift right) - If a firm expects the price of the good it sells to increase in the near future, the firm may decrease supply now to save some in inventory to sell later at the higher price. - Supply decreases (shift left) • Example: Suppose oil producers believe oil prices are going to increase. Their initial response could be to hold back a portion of oil in storage, so they can sell more and make bigger profits later at the higher price. - Supply today decreases (shift left) • Expectations about economic conditions, taxes, input prices, and a number of other things can also affect supply.
fixed supply
The law of supply does not hold if there is no time to produce more units, or if no more can be produced over any period of time.
prices of other goods
The prices of other goods can affect the willingness to supply a good. Example: -As the price of other goods and services changes, will influence sellers decision about supply. Ex: If sellers see that price of cupcakes increases and that you can make more money selling cupcakes than donuts, sellers will decreases supply of donuts and make cupcakes instead so increase supply of cupcakes. (profits=Revenues- cost) (price X quantity sold)
buyer expectations
What people expect to happen in the future affects demand today. Expected income and expected prices affect consumers' buying decisions. (doesn't mean prices have actually changed, they are just expected to) Ex. If you expect your income to decrease next month, you will probably decrease your demand for some goods today. - Demand for these goods will shift left Ex. If people expect the price of iPads to decrease next month, the demand for iPads today would decrease
shortage
a condition in which quantity demanded is greater than quantity supplied (QD>QS). Occurs at any price below equilibrium price. = QD-QS. (prices rise when there is a shortage because buyers are unable to buy all they want at the current price, so sellers can take advantage and raise prices
surplus
a condition in which quantity supplied is greater than quantity demanded (QS>QD). Occurs when the market price is greater than the equilibrium price. = quantity supplied- quantity demanded QS-QD. (price falls when there is a surplus because sellers are unable to sell all they want at the current price, so they will lower prices to sell their and services to increase their quantity demanded Ex: clearance sales)
inferior goods
a good for which demand is negatively related to income. If income increases, demand for inferior goods decreases If income decreases, demand for inferior goods increase. EX: mac & cheese, ramen noodles, off-brands, generic products
change in quantity demanded
a movement from one point to another point on the same demand curve caused by a change in the price of the good
change in quantity supplied
a movement from one point to another point on the same supply curve caused by a change in the price of the good
change in demand
a shift of a demand curve caused by a change in a factor other than the price of the good (gives us a new demand curve)
change in supply
a shift of a supply curve caused by a change in a factor other than the price of the good. new supply curve caused by something other than price of good
Disequilibrium
a state of either surplus or shortage in a market QD (doesn't equal) QS . Either QD >QS (shortage)or QD<QS(surplus) Disequilibrium price- a price other than equilibrium price
Law of demand
as the price of a good rises, the quantity demanded of the good falls, and as the price of a good falls, the quantity demanded of the good rises, ceteris paribus - If Price increases, quantity demand goes down and if price decreases, Quantity demand goes up, (ceteris paribus)
law of supply
as the price of a good rises, the quantity supplied of the good rises, and as the price of a good falls, the quantity supplied of the good falls, ceteris paribus - If price increase, quantity supply increases, if prices decreases, quantity supply decreases, ceteris paribus (positive relationship between Quantity supply and price)
why demand curve is downward sloping
because of negative inverse relationships between price and Quantity demand (ceterus parbus)
Decrease in quantity demanded
buyers are willing and able to buy fewer units of a good at a particular price
decrease in demand
buyers are willing and able to buy less units of a good at every price (shift curve to left)
increase in quantity demanded
buyers are willing and able to buy more units of a good at a particular price.
increase in demand
buyers are willing and able to buy more units of a good at every price (shift curve to right)
demand and supply equations
can be used to find equilibrium price and quantity.1. In equilibrium the quantity demanded (QD) of a good is equal to the quantity supplied (QS): QD=1500-32P+QS=1200+43P Set QD=QS and solve for P: 1500-32P=1200+43P (+32P) (+32P) 1500=1200+43P+32P 1500-1200=75P 300=75P 300/75=p P^e= $4.00 (equilibrium price) 2. Once we know the equilibrium price, we can place this value in either the demand or supply equation to find the equilibrium quantity. - This step is a check; they should equal the same number of units QD= 1500-32($4.00)=1372 units QS= 1200+43($4.00)=1372 units
calculate inflation rate
computed as the percentage change in CPI from the earlier period. inflation rate= (CPI(later period)- CPI (earlier period)/ CPI (earlier period)) *100
macroeconomics
different views of how the economy works, macro problems, macro theories, macro policies
normal goods
good for which demand is positively related to income. If income increases, demand for normal goods increase. If income decreases, demand for normal goods decrease. Ex: clothes, restaurant meals, movie tickets
equilibrium
in a market is the price-quantity combination from which there is no tendency for buyers or sellers to move away. Quantity supply= quantity demand The quantity supplied equals the quantity demanded. Graphically, equilibrium is the intersection point of the supply and demand curves. •Equilibrium price- the price at which quantity demanded equals quantity supplied •Equilibrium quantity-: the quantity at which the amount of the good that buyers are willing and able to buy is equal to the amount that sellers are willing
Factors that shift demand curve
income, price of related goods (substitutes and complements), preferences, number of buyers, buyer expectations
licensure
individuals must meet certain requirements before they can legally carry out a task -Licenses are a cost to sellers Adding restrictions and license requirements raise the cost to produce, so supply will decrease
inflation rate
percentage of change in price level
market demand
represents the price-quantity combinations for all buyers, the sum of all individual demands
market supply
represents the price-quantity combinations for all sellers
individual demand curve
represents the price-quantity combinations of a particular good for a single buyer
law of supply and demand
says that prices will adjust to bring markets into balance
decrease in quantity supplied
sellers are willing and able to sell fewer units of a good at a particular price
decrease in supply
sellers are willing and able to sell fewer units of a good at every price.
increase in quantity supplied
sellers are willing and able to sell more units of a good at a particular price
increase in supply
sellers are willing and able to sell more units of a good at every price
technology
the body of skills and knowledge concerning the use of resources in production. An advance in technology refers to the ability to produce more output with a fixed amount of resources, thus reducing per unit production costs. - Supply increases (shift right). Examples: Assembly line technology, computers, internet
supply curve
the graphical representation of the law of supply, which states that price and quantity supplied are directly related, ceteris paribus. When price increases, it is more profitable to sell, so quantity supplied increases, when prices decreases, it is less profitable to sell, so quantity supplied decreases, ceteris Paribus
demand schedule
the numerical tabulation of the quantity demanded of a good at different prices
supply schedule
the numerical tabulation of the quantity supplied of a good at different prices A supply schedule is the numerical representation of the law of supply.
if both curves shift
the relative sizes of the shifts matter for the effect on our Equilibrium price and Equilibrium quantity -3 possibilities (3 graphs): 1) Supply shifts by a larger amount than Demand shifts. 2) Demand shifts by a larger amount than supply shifts. 3) Supply shifts by same amount as demand
market basket
the representative group of goods and services. fixed basket, a collection of items chosen to represent the purchasing pattern of a typical consumer (consumers don't change spending patterns often). includes 8 major categories of goods and services- housing, foods and beverages, energy, medical care, education and communication, transportation, recreation
Consumer price index
the weighted average of prices of a specific set of goods and services purchased by a typical household. measures the cost of living of a typical consumer. when cpi increases, its costs us more to maintain the same standard of living (needs and wants being met). The CPI is based on a representative group of goods and services purchased by a typical household.
Demand
the willingness and ability of buyers to purchase different quantities of a good at different prices during a specific time period
supply
the willingness and ability of sellers to produce and offer to sell different quantities of a good at different prices during a specific time period
complements
two goods that are used jointly in consumption. If you buy one you will also buy the other good. two goods for which the demand for one good is negatively related to the price of another good. -If Price of good 1 increases, the demand for good 2 decreases -If Price of good 1 decreases, the demand for good 2 increases Ex: chips/salsa, PB/jelly, mp3 players/earphones, laundry det/ dryer sheets, shampoo /conditioner
Substitutes
two goods that satisfy similar needs or wants. Buy one or the other, but not both. Two goods for which the demand for one good is positively related to the price of another good. (If the Price of good 1 increases, the demand for good 2 increases.) (If the Price of good 1 decreases, the demand for good 2 decrease.)For substitutes, if the price of one of the goods increases, people will buy more of the other substitute good instead, which increases its demand Ex: Coke/Pepsi, apples/oranges, cable/satellite
price level
weighted average of the prices of all goods and services. The price level is measured by constructing a price index. The most important price index is the CPI.