Micmac unit 2
how to find equilibrium
find the spot at which the supply and demand curves will intersect
changes in number of consumers
population increase/decrease will shift demand curve right/left
market response to a change in demand
An increase in demand leads to a rise in both the equilibrium price and the equilibrium quantity. A decrease in demand leads to a fall in both the equilibrium price and the equilibrium quantity.
simultaneous and same directions
When both demand and supply increase, the equilibrium quantity rises but the change in the equilibrium price is ambiguous. • When both demand and supply decrease, the equilibrium quantity falls but the change in the equilibrium price is ambiguous.
five principle factors that shift the demand curve for a good or service
* Changes in the prices of related goods or services • Changes in income • Changes in tastes • Changes in expectations • Changes in the number of consumers when we move along the curve, this would be the factor that we say will stay equal
five principles that shift the supply curve
*Changes in input prices • Changes in the prices of related goods or services *Changes in technology • Changes in expectations • Changes in the number of producers
fall in price effect on unit elasticity
There is the price effect of a lower price per unit sold, which tends to lower revenue. This is countered by the quantity effect of more units sold, which tends to raise revenue. Which effect dominates depends on the price elasticity. Here is a quick summary: • When demand is unit-elastic, the two effects exactly balance each other out; so a fall in price has no effect on total revenue. • When demand is inelastic, the price effect dominates the quantity effect; so a fall in price reduces total revenue. • When demand is elastic, the quantity effect dominates the price effect; so a fall in price increases total revenue.
changes in income
Most goods are normal goods—the demand for them increases when consumer income rises. However, the demand for some products falls when income rises. Goods for which demand decreases when income rises are known as inferior goods. Usually an inferior good is one that is considered less desirable than more expensive alternatives
the income effect
he income effect of a change in the price of a good is the change in the quantity of that good demanded that results from a change in the overall purchasing power of the consumer's income when the price of the good changes.
demand curve
how much want is there for something at different prices. As price goes up, demand goes down
income inelastic
if the income elasticity of demand for that good is positive but less than 1. When income rises, the demand for income-inelastic goods rises as well, but more slowly than income. Necessities such as food and clothing tend to be income-inelastic.
equilibrium
in a competitive market this is what supply and demand interaction is going to tend towards when the price has moved to a level at which the quantity of a good demanded equals the quantity of that good supplied. At that price, no individual seller could make herself better off by offering to sell either more or less of the good and no individual buyer could make himself better off by offering to buy more or less of the good.
time
in general, the price elasticity of demand tends to increase as consum-ers have more time to adjust to a price change. This means that the long-run price elasticity of demand is often higher than the short-run elasticity.
Why does the demand curve slope downward?
income effect and substitution effect
increase & decreases & the supply curve
increase moves the supply curve rightward
why does it matter if something is inelastic, elastic, or unit elastic
indicates how changes in the price of a good will affect the total revenue earned by producers from the sale of that good. (price x quantity sold of this good)
changes in input prices
inputs are any good or service needed increase in input price shifts supply curve to the left
when price is above equilibrium level
it will eventually tend towards it because no one is buying
competitive market
many buyers and sellers, each has a negligible effect on price
more general formula for price elasticity of demand given points (Q1, P1) and (Q2, P2)
price elasticity of demand = Q2-Q1/ (Q1+Q2)//2 ///P2-P1/(P1+P2)
portion of income spent on the good
price elasticity of demand tends to be low when spending on good accounts for a small portion of income In that case, a significant change in the price of the good has little impact on how much the consumer spends. In con-trast, when a good accounts for a sig-nificant share of a consumer's spend-ing, the consumer is likely to be very responsive to a change in price. In this case, the price elasticity of demand is high.
law of demand
says that demand curve slopes downwards, so price and quantity demanded always move in opposite directions
changes in technology
technology refers to anything that can make an input into an output improvements in tech make it cost less to make an input into an output better tech will increase supply
Increase/Decrease in Demand
when a factor other than price changes and the quantity demanded increases (decreases) for every price shift left= decrease shift right=increase
changes in price of related good
when price of substitutes in production rise, supply curve shifts left when price of substitutes fall, supply curve shifts right complements: stuff that gets produced along with whatever else is produced when price of complements rise, supply shifts right
what factors effect price elasticity of demand
whether close substitutes are available, whether the good is a necessity or a luxury, the share of income a consumer spends on the good, and how much time has elapsed since the price change
shortage
A situation in which quantity demanded is greater than quantity supplied
midpoint method
A good way to avoid computing different elasticities for rising and falling prices change in X/average value of X x 100 = % change in X average value of x is defined as: starting value of x + final value of x / 2
inelastic demand
A situation in which an increase or a decrease in price will not significantly affect demand for the product
market response to a change in supply
An increase in supply leads to a fall in the equilibrium price and a rise in the equilibrium quantity. A decrease in supply leads to a rise in the equilibrium price and a fall in the equilibrium quantity.
difference between income effect and substitution effect
First, for the majority of goods and services, the income effect is not important and has no significant effect on individual consumption. Thus, most market demand curves slope downward solely because of the substitution effect—end of story. Second, when it matters at all, the income effect usually reinforces the substitution effect. That is, when the price of a good that absorbs a substantial share of income rises, consumers of that good become a bit poorer because their purchasing power falls. And the vast majority of goods are normal goods, goods for which demand decreases when income falls. So this effective reduction in income leads to a reduction in the quantity demanded and reinforces the substitution effect. The income effect of a change in the price of a good is the change in the quantity of that good demanded that results from a change in the consumer's purchasing power when the price of the good changes.
income and substitution effect in the case of an inferior good
However, in the case of an inferior good, a good for which demand increases when income falls, the income and substitution effects work in opposite directions. Although the substitution effect decreases the quantity of any good demanded as its price increases, the income effect of a price increase for an inferior good is an increase in the quantity demanded. This makes sense because the price increase lowers the real income of the consumer, and as real income falls, the demand for an inferior good increases. If a good were so inferior that the income effect exceeded the substitution effect, a price increase would lead to an increase in the quantity demanded. There is controversy over whether such goods, known as "Giffen goods," exist at all. If they do, they are very rare. You can generally assume that the income effect for an inferior good is smaller than the substitution effect, and so a price increase will lead to a decrease in the quantity demanded.
price increase effects by case on price elasticity of demand
If demand for a good is unit-elastic (the price elasticity of demand is 1), an increase in price does not change total revenue. In this case, the quantity effect and the price effect exactly offset each other. • If demand for a good is inelastic (the price elasticity of demand is less than 1), a higher price increases total revenue. In this case, the price effect is stronger than the quantity effect. • If demand for a good is elastic (the price elasticity of demand is greater than 1), an increase in price reduces total revenue. In this case, the quantity effect is stronger than the price effect.
perfectly inelastic supply
Refers to a price elasticity of supply value of zero, and arises in the case of a vertical supply curve.
Whether close substitutes are available
Price elasticity of demand tends to be high if close substitutes are available
availability of inputs
Price elasticity of supply tends to be large when inputs are readily available and can be shifted into and out of production at a relatively low cost. Tends to be small when inputs are difficult to obtain and can be shifted into and out of production only at a relatively high cost.
Time and price elasticity of supply
Price elasticity of supply tends to grow larger as producers have more time to respond to a price change. The long-run price elasticity of supply is often higher than the short-run elasticity.
complementary good
Products and services that are used together. When the price of one falls, the demand for the other increases (and conversely). direct
substitute good
Products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises. inverse
perfectly elastic supply
Refers to a price elasticity of supply value of infinity, and arises in the case of a horizontal supply curve.
price equilibrium
Similarly, at the market equilibrium, the price has moved to a level that exactly matches the quantity demanded by consumers to the quantity supplied by sellers. aka market clearing price- all goods will be sold bc ppl are willing to buy them
perfectly inelastic demand
Since the percent change in the quantity demanded is zero for any change in the price, the price elasticity of demand in this case is zero.
whether good is a necessity or a luxury
The price elasticity of demand tends to be low if the good is something you must have, and high if it is something you can live without.
real income
The amount of goods and services that can be purchased with nominal income during some period of time; nominal income adjusted for inflation.
income elastic
The demand for a good is income-elastic if the income elasticity of demand for that good is greater than 1. when income rises, demand for income elastic goods rises faster than income luxury goods tend to be income elastic
money income
The number of dollars a person receives per period, such as $400 per week not adjusted
perfectly elastic demand
The opposite extreme occurs when even a tiny rise in the price will cause the quantity demanded to drop to zero or even a tiny fall in the price will cause the quantity demanded to get extremely large
changes in expectations
When consumers have some choice about when to make a purchase, current demand for a good is often affected by expectations about its future price. also changes in income expectations, if you thought you would lose a job in future you would prolly reduce ya spending
changes in supply expectations
When suppliers have some choice about when they put their good up for sale, changes in the expected future price of the good can lead a supplier to supply less or more of the good today. so we will save stuff when the prices are going to be lower for later on when prices will be higher (heating oil may not be sold as much in the summer) expected drop in the future price will increase supply today
price elasticity of demand classification
When the price elastic-ity of demand is greater than 1, economists say that demand is elastic. When the price elasticity of demand is less than 1, they say that demand Demand is perfectly elastic when any price increase will cause the quantity demanded to drop to zero. When demand is perfectly elastic, the demand curve is a horizontal line. Demand is elastic if the price elasticity of demand is greater than 1, inelastic if the price elasticity of demand is less than 1, and unit-elastic if the price elas-ticity of demand is exactly 1. is inelastic. The borderline case is unit-elastic demand, where the price elasticity of demand is— surprise—exactly 1.
the substitution effect
When the price of one good decreases, an individual doesn't have to give up as many units of the other good in order to buy one more unit of the first good. That makes it attractive to buy more of the good whose price has gone down. when consumers react to an increase in a good's price by consuming less of that good and more of other goods when good accounts for only a small part of consumers income, the downward slope of the demand curve may be entirely due to the substitution effect
supply curve
a graph of the relationship between the price of a good and the quantity supplied quantity suppliers willing to produce depends on price that they expect to get for it
income elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in consumers' income % in quantity demanded/ % change in income When the income elasticity of demand is positive, the good is a normal good. • When the income elasticity of demand is negative, the good is an inferior good. The income elasticity of demand is the percent change in the quantity of a good demanded when a consumer's income changes divided by the percent change in the consumer's income. used to figure out which industries will grow most rapidly as
price elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in the price of that good, % change in quantity demanded = change in quantity demanded/ initial quantity demanded x 100 the price elasticity of demand, in strictly mathematical terms, is a negative number. However, it is inconvenient to repeat-edly write a minus sign. So when economists talk about the price elasticity of demand, they usually drop the minus sign and report the absolute value of the price elasticity of demand. The larger the price elasticity of demand, the more responsive the quantity demanded is to the price.
cross-price elasticity of demand
a measure of how much the quantity demanded of one good responds to a change in the price of another good cross price elasticity between goods A and B % change in quantity of A demanded/ % change in price of B when two goods are substitutes, this value is positive, the closer they are, the larger the value --- a rise in the price of hot dogs increases the demand for hamburgers—that is, it causes a rightward shift of the demand curve for hamburgers. when two goods are complements, this value is negative, the farther from 0 it is the more closely related they are. --- a rise in the price of hot dogs decreases the demand for hot dog buns—that is, it causes a leftward shift of the demand curve for hot dog buns.
price elasticity of supply
a measure of how much the quantity supplied of a good responds to a change in the price of that good % in quantity supplied/ % change in price we consider movements along supply curve
elasticity
a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants
Elasticity
a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants ratio of percent changes- units don´t matter
demand schedule
a table that shows the relationship between the price of a good and the quantity demanded
supply schedule
a table that shows the relationship between the price of a good and the quantity supplied
quantity effect
after a price increase, fewer units are sold, which tends to lower revenue (not in perfect cases)
what happens to total revenue after a price increase?
an increase in price may either increase total revenue or decrease it. If the price effect, which tends to raise total revenue, is the stronger of the two effects, then total revenue goes up. If the quantity effect, which tends to reduce total revenue, is the stronger, then total revenue goes down. And if the strengths of the two effects are exactly equal—as in our toll bridge example, where a $180 gain offsets a $180 loss—total revenue is unchanged by the price increase.
what factors determine price elasticity of supply
availability of inputs, time
if supply and demand curves simultaneously shift in opposite directions
can´t really predict ultimate resultant effect on quantity bought and sold
rightward shift of demand curve
causes upward movement of supply curve
changes in demand vs movements along the demand curve
changes in demand will shift the entire graph over movements along the curve only result from a change in the price
changes in taste
changes in taste may shift demand curve leftward for some goods and rightward for other ones
law of demand
consumers buy more of a good when its price decreases and less when its price increases
price elasticity along the demand curve
demand is typically elastic in the high-price (low-quantity) range of the demand curve. demand is typically inelastic in the low-price (high-quantity) range of the demand curve. differs at each point
changes in the number of producers
more producers = more supply
price effect
works except for in perfect cases After a price increase, each unit sold sells at a higher price, which tends to raise revenue.
supply and demand model: model of a competitive market
• The demand curve • The supply curve • The set of factors that cause the demand curve to shift and the set of factors that cause the supply curve to shift • The market equilibrium, which includes the equilibrium price and equilibrium quantity • The way the market equilibrium changes when the supply curve or demand curve shifts