ECON 1101 Midterm 1
number of sellers shifter
law of supply shifter
price expectations shifter
law of supply shifter
price of input shifter
law of supply shifter
taxes/subsidies shifter
law of supply shifter
technology shifter
law of supply shifter
law of supply decrease (chart)
left
Inefficiency can be caused in a market by the presence of
market power, externalities, imperfectly competitive markets
price elasticity of demand
measures responsiveness (sensitivity) to price changes
as a tax grows larger....
it distorts incentives more and its deadweight loss grows larger
Demand is perfectly elastic
-when any price increase will cause the quantity demanded to drop to zero - elasticity of demand = infinity -horizontal line
A life- saving medicine without any close substitutes will tend to have
a small elasticity of demand
Demand is perfectly inelastic when
- the quantity demanded does not respond at all to changes in the price - elasticity of demand = 0 - vertical line
Total Revenue (TR)
-Amount paid by buyers and received by sellers of a good -Price of the good times the quantity sold (P ˣ Q)
Impact of the minimum wage on teenage labor
-Least skilled and least experienced -Low equilibrium wages -Willing to accept a lower wage in exchange for on-the-job training -Minimum wage: binding
Determinants of Price Elasticity of Demand/what makes it more elastic
1. availability of close substitutes 2.necessities versus luxuries 3.definition of the market 4.time horizon
The price of a good rises from $8 to $12, and the quantity demanded falls from 110 to 90 units. Calculated with the midpoint method, the price elasticity of demand is
1/2
Which of the following might lead to an increase in the equilibrium price of jelly and a decrease in the equilibrium quantity of jelly sold?
An increase in the price of grapes, an input into jelly
What would happen to the demand-supply curve if there was a hurricane?
Demand increases (right), supply decreases (left)
Time Horizon
Demand is more elastic over longer time horizons
The distinction between efficiency and equality can be described as follows:
Efficiency refers to maximizing the size of the pie; equality refers to distributing the pie fairly among members of society
demand is elastic
Elasticity > 1
Price of Related Goods: Substitutes shifter example (demand)
Hamburgers a substitute for Pizza If hamburgers price went up, Pizza's demand would go up If Pizza's price went up, hamburgers demand would go up
price of input shifter example (supply)
Higher input prices, decrease in supply lower input prices, increase in supply
Price of Related Goods: Complements shifter example (demand)
If price of coke goes up/down than Pizza goes up/down with it
Necessities versus Luxuries
Necessities: inelastic demands luxuries: elastic demand.
What happens to TR / P when demand is elastic?
P and TR move in opposite direction
What happens to TR / P when demand is inelastic?
P and TR move in the same direction
How to compute the price elasticity of demand
PEOD = % change in quanity demanded / % change in price
demand shifts to left
Price falls, quantity falls
Elastic examples
Products that have substitutes Products that take a large portion of a consumer's budget Narrowly defined markets (ice cream) Long-run demand Luxuries
For a price increase, if demand is elastic
TR decreases
What happens to TR / P when demand is unit elastic?
TR remains constant when price changes
government uses taxes to
To raise revenue for public projects •Roads, schools, and national defense
law of supply relationship
a positive relationship, as price goes up quantity supplied goes up
Income shifter example (demand)
as income goes up, demand would go up (right) ( more purchasing power)
Population shifter example (demand)
as population increases (more buyers) than demand increases (right)
weather shifter example (supply)
bad weather factors can cause supply to decrease (left) Hurricane destroys sugar crop, the higher the price of sugar but the demand goes up Heatwave shifts the demand curve up (right); hurricane shifts the supply curve down (left)
more tax revenue
bigger deadweight loss
Movement along a fixed demand curve
change in quantity demanded
Movement along a fixed supply curve
change in quantity supplied
Law of Demand
consumers buy more of a good when its price decreases and less when its price increases When the price of a good rises, the quantity demanded of the good falls When the price falls, the quantity demanded rise
as the income increases the demand for a normal good
decreases
as the income increases the demand for the inferior good
decreases
As the price of a complement increases
demand goes down (left)
As the price of substitutes decreases
demand goes down (left)
As the price of substitutes increases
demand goes up (right)
as price of a complement decreases
demand goes up (right)
Price of Related Goods: Substitutes and complement
demand shifter
income
demand shifter
population
demand shifter
taste/preference
demand shifter
Buyers as a group
determine the demand for the product
Sellers as a group
determine the supply of the product
If price increases by 1% and Qd decreases by 0.50% then
elasticity = .5
If price increases by 1% and Qd decreases by 1% then
elasticity = 1
demand is unit elastic
elasticity = 1
if price increases by 1% and Quantity demanded decreases by 2% then
elasticity = 2
Demand is elastic when
elasticity is greater > 1
demand is inelastic when
elasticity is less < 1
price expectation shifter example (supply)
expected higher prices, decrease in supply
the more inelastic (chart)
flat
Inelastic examples
gas, utilities, medication
A competitive market is one in which
here are so many buyers and so many sellers that each has a negligible impact on the price of the product
technology shifter example (supply)
improved technology has a lower price, the supply will increase/curve will shift to the right
Demand Shifters
income, population, price of substitutes, price of related goods, taste/preference
as the income decreases the demand for the inferior good
increases
as the income increases the demand for a normal good
increases
Rent Control in the Short Run is elastic or inelastic
inelastic
price insensitive
inelastic
Elasticity < 1 (inelastic)
inferior good
income relationship for inferior good
inverse relationship (as income goes up, demand goes down-as income goes down, demand goes up)
Law of demand relationship
inverse relationship between price and demand
Elasticity > 1 (elastic)
normal good, luxury good
income relationship for normal good
positive relationship (as income goes up, demand goes up-as income goes down, demand goes down)
supply increases
price decreases and quantity increases
Demand is inelastic
price elasticity of demand < 1
demand has unit elasticity when
price elasticity of demand = 1
supply decreases
price increases and quantity decreases
Law of supply shifters
price of input, taxes/subsidies, weather, number of sellers, price expectation, technology
demand shifts to right
price rises, quantity rises
When consumers face rising gasoline prices, they typically
reduce their quantity demanded more in the long run than in the short run
Taste/Preference shifter (demand)
research says red meat is unhealthy, demand for red meat goes down
law of supply increase (chart)
right
demand decreases (chart)
shift to left
demand increases (chart)
shift to right
the more elastic (chart)
steep
weather shifter
supply and demand shifter
# of sellers shifters example (supply)
supply increases as sellers increase
The discovery of a large new reserve of crude oil will shift ________ curve for gasoline, leading to a __________equilibrium price
supply, lower
taxes/subsidies shifter example (supply)
taxes can decrease supply, subsidies (payments gov make to company) increase supply
Deadweight loss on tax
the fall in total surplus, the sum of consumer surplus, producer surplus and tax revenue is the deadweight loss of the tax
the flatter the demand curve
the greater the price elasticity of demand
Definition of the Market
the more narrowly we define a market, the more elastic demand will be
availability of close substitutes
the more substitutes a good has, the more elastic its demand
A change in which of the following will NOT shift the demand curve for hamburgers?
the price of hamburgers Therefore, if the price of hamburgers changes, the result is a MOVEMENT along the demand curve from the old price to the new one. However, if a change occurs in any of the factors that determine demand - such as the price of hot dogs ( a substitute), the price of hamburger buns (a complement), or the income of hamburger consumers - the result is a shift of the demand curve
Law of supply
the quantity supplied of a good rise when the price of the good rises
for a price decrease if demand is inelastic
tr decrease
For a price decrease if demand is elastic
tr increases
For a price increase, if demand is inelastic
tr increases