ch. 2 demand and supply

comparative-static problem steps

(1)determine whether the demand curve or the supply curve will be affected, (2) determine the direction in which the affected curve will shift. Recall that demand curves shift either to the north-east or the south-west and supply curves shift to either the south-east or the north-west, (3) compare the equilibrium price and equilibrium quantity before and after the change. Price and quantity may increase, decrease, remain unchanged or be ambiguous because all three (an increase, decrease or no change) options are possible

which of the following is not an element of the market demand curve for wine? (a) the price of wine, (b) the price of wine bottling machine, (c) income, (d) expectations, (e) the price of a substitute good

(b) the price of a wine bottling machine; the quantity demanded of wine is the dependent variable which depends on many independent variables. It depends, foremost, on the market price. The price of wine is an independent variable because it is determined by the wine market. The other independent variables that affect the quantity demanded of wine are the price of complements, the price of substitutes, income, tastes and preferences, and the expectations of the future. The wine bottling machine is a cost of producing wine and is therefore not an element of the demand function

market supply function

=g (product; product 1, labor, capital, land, price of other inputs, tech, expectations, # of sellers)

general equation

=g(product; product 1, labor, capital, land, price other inputs, tech, expectations

A price floor is a legally imposed maximum price

FALSE; a price floor is a government imposed and legally enforced minimum market price. Whenever a price floor is above the equilibrium price, the quantity supplied will exceed the quantity demanded. When this happens, there will be a quantity surplus at the price floor. However, the government imposed price floor is below the equilibrium price, then the price floor has no effect on the market.(same with price ceiling)

The law of demand states that is a price of a good increases, ceteris paribus, then the quantity demanded of that good will increase(T/F)

False; If the price of wine increases, then ceteris paribus, the quantity of wine will decrease. This negative relationship between the price of a good and the quantity demanded of that good is called the law of demand

the law of supply states that if the price of a good increases, ceteris paribus, then the quantity supplied of that good will also increase

TRUE; If the price of a good decreases, then ceteris paribus, the quantity supplied of that good will decrease. This positive relationship between price and quantity is called the law of supply

Suppose the cross price elasticity of demand for home heating oil with respect to the price of natural gas is +0.6. This number tells us that home heating oil and natural gas are substitute goods

True; The coefficients of cross price elasticities can be positive or negative. If the coefficient of the cross price elasticity is a negative number, then the two goods are complements. If the coefficient of the cross price elasticity is a positive number, then the two goods are substitutes.

price ceiling

a government imposed and legally enforced maximum market price (rent controlled apt)

income elasticity of demand

a measure of the relationship between a percentage change in income and a consequential percentage change in the quantity demanded of a product; when the coefficient is positive then the good under analysis is a normal good, when it is negative, it is an inferior good

the income elasticity of demand

a measure of the relationship between a percentage change in income and consequential percentage change in the quantity demanded of a product

the cross price elasticity of demand

a measure of the relationship between a percentage change in the market price of a product X and consequential percentage change in the quantity demanded of product Y

The price elasticity of demand

a measure of the relationship between a percentage change in the market price of a product and a consequential percentage change in the quantity demanded of a product

the elasticity of demand

a measure of the relationship between a percentage change in the market price of a product and consequential percentage change in the quantity supplied of a product

price of elasticity of demand

a measure of the relationship between a percentage change in the market price of product and a consequential percentage change in the quantity demanded of a product

legal responsibility

amount paid to govt

Suppose consumers consider hot dogs and hot dog buns compliments. Which of the following would cause an increase in the price of hot dogs and a decrease in the quantity demanded of hot dog buns?

an increase in the price of pork; An increase in the price of pork would cause the market supply curve for hot dog buns to shift to the north-west, causing an increase in the price of hot dogs and a decrease in the quantity demanded of hot dogs. Hot dog buns are compliments to hot dogs. The increase in the price of hot dogs causes the demand curve for hot dog buns to shift to the south-west. As a result, the quantity demanded of hot dog buns decreases

substitute goods

and alternative when a product is unavailable or too expensive

number of sellers in the market

as the # increases, ceteris paribus, the market supply curve shifts to the south-east. If the number of sellers decreases, ceteris paribus, the market supply curve shifts to thr north-west

law of demand

as the price of a good increases ceteris paribus, the quantity demand of the good decreases

law of supply

as the price of a good increases, ceteris paribus, the quantity will increase.

If the number of substitutes for retail telephone service increases, the price elasticity of demand will be (a) more elastic or (b) more inelastic

b. When the number of substitute products increases, the price elasticity of demand will become more elastic. Consumers become more sensitive to price when they have more options to choose among.

What would cause a decrease in the price of hot dogs and qty of hot dog buns demanded if they are compliments? (a) an increase in the price of flour, (b) a decrease in the price of flour (c) an increase in the price of pork (d) a decrease in the price of pork

d) increase in the price of flour; an increase in the price of flour would cause the market supply curve for hot dog buns to shift to the north-west, causing a decrease in the quantity demanded of hot dog buns and an increase in the price of hot dog buns. Hot do buns are a complement to hot dogs. The increase in the price of hot dog buns causes the market demand curve for hot dogs to shift to the south west. As a result, the price of hot dogs decreases and the quality demanded of hot dogs decreases

general equation

demand = f (product; complement, substitute, income, tastes & preferences, expectations)

supply curve moves south-east

indicates it is less expensive to produce each unit of product

supply curve moves north-west

indicates it is more expensive to produce the product

ceteris paribus

latin for "other things equal", when used every independent variable except the price of the product is held constant; if the price decreases then the demand will increase; if the price increases the demand will decrease (law of demand)

shortage

not enough to meet demand

quantity demanded

number desired

demand curve shifts

occurs when there is a change in one of the independent variables held under the ceteris paribus assumption; the curve will only shift when a second proverbial digital photo of the marketplace is taken - there is no exception tp this rule

independent variable curve

only moves to the north-west or south-east

inferior good

positive change in income will cause the buyer to purchase less

normal good

positive change with income will cause the buyer to purchase more

independent variables

price of capital equipment, price of land, price of labor, price of other inputs, technology, expectations

influential variables

prices of complementary goods and prices of substitute goods

demand

relationship that reveals how many of the product are demanded at each price interval

tastes and preferences

satisfaction, enjoyment, pleasure (influences purchasing)

directions of the demand curve shift

south-west or north-east

economic burden

split amount of legal responsibility

market equilibrium point

the point where sellers price equal the buyers purchase point

comparative-static analysis

the process of comparing two market equilibrium (static) points, one equilibrium point before and the other after a change in an independent variable

mid-point formula

used by economists to calculate the price elasticity of demand

cross price elasticity coefficient

used to observe whether two goods are related; and if they are related as complements or substitutes - this changes the demand depending on if they are a complement or substitute and by how much. (if the coefficient is negative, they are compliments, if the coefficient is positive, they are substitutes)

expectations of the future

variables that informs the purchasers decision to buy based on their immediate circumstances

complementary goods

when a good is often bought with another good (PB & Jelly)

nonbinding

when a price set by govt is below the price ceiling of the product

unit elastic/ of unitary elasticity

when the elasticity of demand has an abosolute value of one

elastic

when the elasticity of demand has an absolute value greater than one

inelastic

when the elasticity of demand has an absolute value of less than one

binding

when the price changes as a result of the government policy