Econ 201

Determinants of Demand

(1) (own) Price (2) Income (3) Tastes/Preferences (4) Prices of Closely Related Goods (Substitutes and Complements) (5) Expectations of Future Events such as falling or rising prices.

Determinants of Supply

(1) resource prices and (2) technology

There are 4 potential groups of "losers" due to increased wages

1. Workers lose when output falls (from Q to Q') and therefore fewer workers are needed. 2. Consumers lose because they now pay higher prices (from P to P'). 3. Businesses lose because their costs of production go up thus lowering profits. 4. Governments lose when tax revenues drop if firms sell less and/or go out of business.

PPF assumptions

1. only 2 goods are produced 2. all resources are fixed in supply 3. technology (how resources are put together to make the 2 goods) is fixed 4. the same resources may be used to produce either good; and 5. all resources are fully utilized.

Total surplus

Sum of producer and consumer surplus

Pareto-Efficient Allocation

When no further Pareto-superior improvements are possible

Pareto-Superior Move

a move from one combination to another makes at least one individual better off without making any other worse off

Substitute goods

a pair of goods whereby a price rise of one causes a higher demand for the other, ceteris paribus

Demand

a relationship between price and quantity demanded of a particular good, at a particular time

Equilibrium

a situation whereby there is no tendency for price or quantity to change, where supply and demand curves intersect

a. Cars are becoming more fuel efficient, and therefore get more miles to the gallon.

a. More fuel efficient cars means there is less need for gasoline. This causes a leftward shift in the demand for gasoline and thus oil. Since the demand curve is shifting down the supply curve, the equilibrium price and quantity both fall.

the production possibilities frontier itself consists of

all the possible pareto-efficient combinations

Complementary goods

are a pair of goods whereby a price rise of one causes a lower demand for the other, ceteris paribus

substitution effect

arises because consumers purchase more of a product as its price falls, and fewer substitutes goods

income effect

arises because falling prices allow higher consumption within the consumer's fixed budget

law of increasing opportunity cost

arises because resources are scarce and heterogeneous

change in demand

arises when there is a new relation between price and quantity of demand, ceteris paribus

b. The winter is exceptionally cold.

b. Cold weather increases the need for heating oil. This causes a rightward shift in the demand for heating oil and thus oil. Since the demand curve is shifting up the supply curve, the equilibrium price and quantity both rise.

c. A major discovery of new oil is made off the coast of Norway.

c. A discovery of new oil will make oil more abundant. This can be shown as a rightward shift in the supply curve, which will cause a decrease in the equilibrium price along with an increase in the equilibrium quantity. (The supply curve shifts down the demand curve so price and quantity follow the law of demand. If price goes up, then the quantity goes down.)

d. The economies of some major oil-using nations, like Japan, slow down.

d. When an economy slows down, it produces less output and demands fewer inputs, including energy, which is used in the production of virtually everything. A decrease in demand for energy will be reflected as a decrease in the demand for oil, or a leftward shift in demand for oil. Since the demand curve is shifting down the supply curve, both the equilibrium price and quantity of oil will fall.

Consumer surplus comes from the notion that

demand curves represent maximum prices that consumers are willing & able to purchase specific quantities of goods & services

Consumer surplus

difference between what consumers are at most willing to pay and what they actually pay

e. A war in the Middle East disrupts oil-pumping schedules.

e. Disruption of oil pumping will reduce the supply of oil. This leftward shift in the supply curve will show a movement up the demand curve, resulting in an increase in the equilibrium price of oil and a decrease in the equilibrium quantity.

Stock

equity stake of its owners

Production Possibilities Frontier (PPF)

exhibits how many goods & services may be produced within an economy

f. Landlords install additional insulation in buildings.

f. Increased insulation will decrease the demand for heating. This leftward shift in the demand for oil causes a movement down the supply curve resulting in a decrease in the equilibrium price and quantity of oil.

Adam Smith

first to marvel at how markets promote the greater social purpose as if guided by an "invisible hand"

demand for labor

from the point of view of employers: the higher the wage, the fewer workers they will employ

supply of labor

from the point of view of workers. Workers want to work more as wage rates rise

g. The price of solar energy falls dramatically.

g. Solar energy is a substitute for oil-based energy. So if solar energy becomes cheaper, the demand for oil will decrease as consumers switch from oil to solar. The decrease in demand for oil will be shown as a leftward shift in the demand curve. As the demand curve shifts down the supply curve, both equilibrium price and quantity for oil will fall.

h. Chemical companies invent a new, popular kind of plastic made from oil.

h. A new, popular kind of plastic will increase the demand for oil. The increase in demand will be shown as a rightward shift in demand, raising the equilibrium price and quantity of oil.

Market demand curve

horizontal summation of all the individual demand curves

Negative externalities

individuals do not pay for all the resources that they use, arise when there is a divergence between private costs and social costs (Ex. cost of noise)

Normative economic analysis

involves opinion or subjective evaluation

Positive economic analysis

involves pure "scientific" prediction

Scarce resources

land, labor, capital and entrepreneurship

Prices

language of markets

Supply

lists units of a specific product that sellers are willing & able to sell at various prices during a given time period, ceteris paribus

Invisible hand

mass of knowledge brought to markets defies easy comprehension, but nonetheless consumers and producers unwittingly provide it to markets

Market equilibrium also occurs where total surplus is

maximized

Ceteris paribus

means "holding all else that matters constant."

Opportunity cost

measures loss of the next best alternative

Scarcity

necessitates choice

Positive externalities

occur whenever private markets fail to allocate resources on the basis of social benefits

normal good

one where an increase in income causes demand for the (normal) good to rise

inferior good

one where an increase in income causes demand to fall

determinants of demand are

price, income, taste, prices of closely-related goods, and expectations of changes in these same factors

Price floor

protects markets by not letting the price drop too low

Successful businesses

provide products consumers want at prices that allow them to remain in business

Shortage

quantity demanded exceeds quantity supplied

Surplus

quantity supplied exceeds quantity demanded

Price ceiling

rationalized by the belief that the private market would set the price "too high" and therefore a price ceiling is warranted to "protect" consumers

Microeconomics

studies individual economic units; e.g., businesses, consumers

Macroeconomics

studies the economy as a whole; e.g., gross domestic product (GDP)

Price system

the ability of prices to fluctuate in a private market economy and thereby remove shortages or surpluses - that is, reach equilibrium

Producer Surplus

the difference between what producers receive and the minimum payments they would have been willing to receive

Economics

the study of the allocation of scarce resources to satisfy competing ends

Total welfare

the sum of the welfare of consumers (consumer surplus) and the welfare of producers (producer surplus)

law of demand

there is an inverse relation between price and quantity demanded of a good or service, ceteris paribus

Market surplus is a distance, not an area

true

Price per unit is always on the _________________, and quantity of demand always on the ______________.

vertical axis, horizontal axis

efficient level of production

would consider all costs and occurs at the intersection of demand and social costs curve