economics supply and demand
Cross Price Elasticity
% change in demand of Coke/ % change in price of pepsi
factors that cause a shift: other goods
- Substitutes in Production: goods that are CO-PRODUCED - Complements in production: goods that are the BY-PRODUCTS in production - prices change in other products produced by firms - the same resources can be used to produce different goods
if the decrease in demand is greater than the increase in supply, equilibrium quantity will _____
- quantity will decrease
Consequences of Price Ceilings: Inefficient allocation of resources
- when resources aren't put where they should be in the market place (people want stuff but don't get it; houses taken by people not in poverty)
consequences of price ceilings: inefficiently low quality
- with rent control there is no incentive to provide better quality because you will get the same amount of money for the product
List of factors that cause a shift
1. # of consumers 2. tastes and preferences 3. expectations of future prices 4. income (normal and inferior goods) 5. related goods (substitutes and complements)
Factors that cause a shift: Technology
1. All of the methods that people can use to turn inputs into useful goods and services - reduces per unit costs - increases profitability
Factors that cause a shift: subsidies and taxes
1. SUBSIDIES reduce the per unit cost and increase of quantity supplied at each possible price 2. TAXES raise the per unit cost and decrease the quantity supplied at each possible price
if supply increases and demand increases
1. equilibrium quantity will INCREASE 2. equilibrium price will be AMBIGUOUS
if supply decreases and demand increases
1. equilibrium quantity will be AMBIGUOUS 2. equilibrium price will INCREASE
if supply increases and demand decreases
1. equilibrium quantity will be be AMBIGUOUS 2. equilibrium price will DECREASE
Factors that cause a shift: expectations of future price
1. expect prices to go up later, BUY NOW (shift the right) 2. expect prices to go down later, BUY LATER (decreased demand now); shift to the left
factors that cause a shift: tastes and preference
1. fads 2. when taste changes in favor, the curve shifts to the right 3. when taste changes against, curve shifts to the left
factors that cause a shift: number of consumers
1. more buyers= greater demand= to the right 2. fewer buyers= less demand= to the left CAUSED BY demographic changes or in the availability in more markets
factors that cause a shift: number of sellers
1. more sellers= greater supply 2. fewer sellers= lower supply
movements along vs shifts of the supply and demand curve
1. movement along the curve is caused by PRICE 2. shifts of the curve involve change in DEMAND AT ALL POSSIBLE PRICES
factors that cause a shift: resources (price of inputs)
1. resources are necessary to produce goods 2. increases in the price of resources raises the per unit cost, which LOWERS THE SUPPLY 3. decreases in the price of resources lowers the per unit cost, which INCREASES THE SUPPLY
factors that cause a shift: expectations of future prices
1. sellers will REDUCE the SUPPLY now if they expect a HIGHER price in the future 2. sellers will INCREASE the SUPPLY now if they expect a LOWER PRICE IN THE FUTURE
Factors that Cause a Shift
1. subsidies and taxes 2. technology 3. Number of Sellers 4. other goods (substitutes in production and complements in production) 5. expectation of future prices 6. resources (prices of inputs)
if supply decreases and demand decreases
1. the Equilibrium quantity will DECREASE 2. the equilibrium price will be AMBIGUOUS
The Law of Demand
1. when prices increases, the quantity demanded decreases 2. when the price decreases, the quantity demanded increases 3. there is an INVERSE relationship between price and quantity demanded 4. price on the y axis, demand on the x axis. slope down from high price to high demand
The Law of Supply
1. when the price increases, the quantity supplied increases 2. when the price decreased, the quantity supplied decreases 3. there is a positive or direct relationship between the price and quantity supplied THE GRAPH: - price on y axis - supplied on x axis - from low price to high price like an arrow up
Determinants of Elasticity:
1.Time Horizon: short time= inelastic but in long run= elastic 2. Availability of Substitutes= elastic (buy other) 3. necessity vs luxury 4. % share of budget, change habits
demand
A SCHEDULE OR CURVE that shows the various amounts of a proudct that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time, CETTERIS PARIBUS
Polar Cases of Elasticity: Perfectly Elastic
Perfectly Elastic= stop buying at one point= horizontal line
Polar Cases of Elasticity: Perfectly Inelastic
Perfectly inelastic= no response= vertical line
Inelastic Demand
When quantity demanded is not very responsive to the price, the % change in quantity demanded will be less than the % change in price. the price elasticity will be LESS than 1 in absolute value
income effect
a price increase cause consumers to feel poorer and a price decrease causes them to feel richer
inferior goods
a rise in income decreases the demand for the good
normal goods
a rise in income increases the demand for the good (Disney world, nice restaurant)
Supply
a schedule or curve that shows the various amounts of a product that producers are willing and able to supply at each of a series of possible prices during a specified period of time
when two goods have a negative cross price elasticity , they are
complements
black markets
consequences of price ceilings
illegal activity
consequences of price floors
complements
consumed jointly; directly related; price rise in one good leads to a decrease demand in the other good
Substitution Effect
consumers switch away froma good whose price has risen towards goods that do not experience a price increase
if the decrease in in demand is greater than the decrease in supply, equilibrium price will ____
decrease
if the decrease in supply is greater than the increase in demand, equilibrium quantity will ____
decrease
if the increase in supply is greater than the increase in demand, equilibrium price will
decrease
If the price ceiling is above the equilibrium point, it______
does nothing
When both supply and demand change at the same time, we should be able to predict changes to either:
equilibrium price or equilibrium quantity
Elastic Demand
if the quantity demanded is responsive in price, % change in demand will be greater than the % change in price. he price elasticity will be GREATER than 1 in absolute value
Price elasticity of demand
is a measure of responsiveness of the quantity demanded to a change in price
consequences of price floors: wasted resources
not go on market; won't get it to people; wasted
consequences of price ceilings: wasted resources
people who are willing to pay higher rent but can't get an apartment; shortage of apartments
consequences of price floors: low quantity of buyers
people won't put the thing on the market because there won't be buyers
basic measure is
percent change in quantity demanded divided by percent change in price - abs value
consequences of price floors: inefficient allocation of sales among sellers:
price raised, sellers sell it ; but buyers won't buy it
substitute
satisfy similar need and desires; a rise in the price of one causes consumers to be more willing to buy the other
when two goods have a positive cross price elasticity, they are
substitutes
consequences of price floors: insufficiently high quality
suppliers forced to make a high quality of product but buyers wont buy it at that high price
quantity demanded
the ACTUAL QUANTITY consumers are willing to buy at a specified price
Quantity Supplied
the actual quantity that producers are willing to sell at a specified price
The midpoint formula
uses the average of the intital and final quantity and initial and final price; Ed= Quantity 1 - Quantity 2 / (Q1+ Q2)/2////// P1- P2 / (p1+ p2)/ 2
unit elastic demand
when the % change in quantity demanded is equal to the % change in price, The elasticity would be equal to 1