ECON CH. 3-5
Ceteris Paribus
a Latin phrase that means "holding other things held constant"
Price Elasticity of Supply
% change in quantity supplied / % change in price
On weeknights an Uber driver can expect to earn $110 driving a six-hour shift. Surge pricing on Saturday nights means that Uber drivers can expect to earn $140 driving a six-hour shift. On weeknights, there are 200 drivers on the road, which rises to 300 on Saturdays. Calculate the price elasticity of supply of Uber drivers using the midpoint formula.
1.67
individual supply curve
A graph plotting the quantity of an item that a business plans to sell at each price. quantity and price graph is what it is in short words *supply curve visually summarizes the selling plans of a business, and how those plans vary with price
Seller mindset
Ex. if you have a job, you sell your labor in return for a wage
The Rational Rule
If something is worth doing, keep doing it until your marginal benefits equal your marginal costs. Supply curve is also your marginal cost curve Supply summarized the price at which you are willing to sell each quantity The price you are willing to sell each unit for is informed by the marginal cost of producing that unit
Diving into the definiton
Individual (referring to one business) Supply (examining selling decisions) Curve: (we are graphing things)
Market Supply Formula
Individual supply x number of suppliers = Market supply
Not all Markets are Perfectly Competitive
Most markets have some degree of imperfection: only a few buyers and /or sellers selling a unique product product has loyal customers Result: Buyers and sellers may no longer be price-takers So why start with perfect competition? * Nearly all markets have some degree of competition * Simplifies analysis * Build an analytical foundation
Insights from price elasticity of demand
Use price elasticity of demand to forecast the likely consequence of a given price change % change in quantity demanded = price elasticity of demand x percentage change in price Shorthand equivalent: %^Q = price elasticity of demand x %^P
Elasticity and Revenue
a change in price leads to a change in quantity demanded in the opposite direction impact of a price change on total revenue depends on which change was relatively bigger: price or quantity The price elasticity of demand (elastic versus inelastic) tells us whether the percentage changes in price is smaller or larger than the percentage change in quantity a decrease in price will only cause revenue to rise if... % change in price smaller than % change in quantity Elastic demand: the quantity demanded is relatively responsive to a change in price, so when the price falls, the quantity demanded rises a lot in response to the price cut Ex. (extra sales make up for the price cut) An increase in price will only cause revenue to rise if % change in price is larger than % change in quantity Inelastic demand: The quantity demanded is relatively unresponsive to a change in price, so when the price rises, the quantity demanded does not fall by much.
Market Supply Curve
a graph plotting the total quantity of an item supplied by the entire market, at each price Individual supply curves are the building blocks of market supply: * at each price, the total quantity of gas supplied is the sum of the quantity that each business will supply at that price. * The market supply curve visually summarizes these selling decisions across the various price points
Market
a setting that brings potential buyers and sellers together
Supply and demand can also be thought of as:
cost and benefit
Which of these LEAST describes an example of bundling?
going out to dinner and eating the complimentary bread paying for valet parking at a restaurant instead of waiting for an open spot (WRONG)
Discretion & Continuous Examples Link
https://www.mymarketresearchmethods.com/data-types-in-statistics/examples-of-discrete-and-continuous-data/
Jamal is an engineer working at a large lithium-ion battery production facility. He recently made a breakthrough causing the production cost of lithium-ion batteries used in smartphones to go down. In the market for smartphones, this innovation will cause the equilibrium quantity to _____ and the equilibrium price to _____.
if production costs go down, the price will fall and quantity will rise Answer: rise; fall
Shortage
if the quantity demanded exceeds the quantity supplied QD > QS whenever price is below equilibrium, lower price = larger shortage
Marginal Costs
include variable costs but exclude fixed costs Variable Costs: costs that grow with quantity Fixed Costs stay the same Marginal costs are your additional variable costs
The price elasticity of demand for rice and pasta is very _____, while the price elasticity of demand for restaurant meals is very _____.
inelastic; elastic
Supply is _____ whenever the percent change in quantity supplied is _____ than the percent change in price.
inelastic; smaller
Perfect competition involves:
many buyers and sellers of an identical good
In _____, if you raise your price by even a small amount, the quantity demanded of your products goes to zero.
perfectly competitive markets
The supply and demand curves covered in the book so far are most appropriate for analyzing:
perfectly competitive markets
Mrs. Johnson decides that she is going to create her own country. She determines that she will be in charge of all production matters because she knows how to do things more efficiently than anybody else. What kind of economy has Mrs. Johnson effectively created?
planned
Surplus
quantity demanded is less than the quantity supplied QD < QS whenever price is above the equilibrium, move above more surplus
Equilibrium Price
the price at which the market is in equilibrium
Inelastic demand and Elastic demand differences
A product with inelastic demand allows a business to charge a higher price and increase its profit margin with a limited impact on units sold. However, for a product with elastic demand, a business needs to charge a lower price to boost sales volume and maintain a steady level of demand and profit.
Why may you want to raise your prices when you discover that demand for your product is inelastic?
Because raising prices will increase your revenue.
Recall that the demand curve presents your marginal benefit curve. With this in mind, and with no change in the availability of water, why is it that your willingness to pay for water is relatively small compared to other, nonessential goods?
Because your water consumption is based on marginal benefit, not total benefit.
During the coronavirus pandemic, the price for child care did not change while there was an enormous decline in the quantity used. What explains this scenario?
Both supply and demand for child care fell and offset each other. (There was a sharp decline in demand, as parents lost their jobs) WRONG There was an increase in supply and decrease in demand (WRONG)
Planned Economy
Centralized decisions are made about what is produced, how, by whom, and who gets what.
Hard to get an A on assignments because Dr. Larson's grades roughly but fairly. He is a supplier of grades while students are on the demand side. Why is it hard to pass his class?
Demand is high because price is high
The supply curve is upward-sloping
Diminishing marginal costs explains why the supply curve is upward-sloping Eventually, as you try to expand production, there will be bottlenecks that cause marginal costs to increase Marginal Product: the increase in output that arises from an additional unit of an input, like labor Diminishing marginal product: * sets the stage for rising marginal costs The marginal product of an input declines as you use more of that input Diminishing marginal product can occur in the short run when some of your inputs are fixed Can also occur in the long run because despite being able to increase all inputs (expand kitchen or open another restaurant)... * the new location isn't as good * workers less experienced Ultimately, adding extra inputs won't produce as much extra output. Thus marginal cost rise! This marginal costs of production rise which translates into upwards slopping supply curve * Rising input costs also lead to rising marginal costs Pay time-and-a-half to get your staff to work overtime Need to offer higher wages to attract more workers Harder to find workers or other inputs Whatever the reason, marginal costs start to rise, and so the supply curve slopes upward
If the price of eggs were to rise by 12%, and if the price elasticity of demand for eggs is around −0.5, will the quantity demanded for eggs increase or decrease, and by what percent?
ED is < 1 so it is relatively inelastic this means that the change in quantity demanded will not change by much therefore, it is a decrease of 6% because if the price goes up, the quantity will go down slightly
Market Economy
Each individual makes their own production and consumption decisions buying and selling in markets
Key take-aways: Price elasticity of demand
Price elasticity of demand -> how buyers respond to a change in price Elastic demand - buyers are very responsive to changes in price - visually, elastic demand curves are relatively flat - substitutes available Inelastic demand - buyers are not responsive to changes in price - visually, inelastic demand curves are relatively steep - substitutes not available Elasticity calculations - use the midpoint formula when calculating percentage changes
Determinants of the Price Elasticity of Supply
Supply elasticity is all about flexibility! 1. Inventories make supply more elastic 2. easily available variable inputs make supply elastic 3. extra capacity makes supply elastic 4. easy entry and exit make supply more elastic 5. overtime, supply becomes more elastic Storable Products: Gasoline Non-storable products: baked goods If your product is easily stored, then... - stockpile your product if prices are low - dial up supply by selling stored inventories when the prices are high Result: elastic supply - sellers can respond rapidly to price changes - sellers have the flexibility to adjust the quantity supplied to the market as the price changes If the variable inputs needed to expand production are easily available, then... quickly acquire more of these inputs and start producing more. Result: elastic supply sellers have the flexibility to respond to price changes Landscaping example: you can easily hire more workers and buy more lawncare supplies when prices of landscaping services rise - elastic supply Vehicle Example: If chips not as available, cars cannot be produced even when prices are high therefore creating a inelastic supply
Visualizing Relative Elasticities
The same change in price can cause a different change in quantity, depending on the elasticity. Elastic Demand: Buyers are very responsive to price and so the quantity demanded rises by a lot Inelastic Demand: Buyers are not very responsive to price, so the quantity demanded rises only a little.
Key take-aways: Revenue and Elasticity
Total Revenue = price x quantity Revenue and Elastic Demand - buyers are very responsive to changes in price - lowering the price will result in a relatively big increase in the quantity purchased. Revenue will ultimately go up Revenue and Inelastic Demand - buyers are not responsive to changes in price - raising the price will result in a relatively small decrease in the quantity purchases Revenue will ultimately go up
Law of Supply
When price rises, quantity supplied rises when price falls, quantity supplied falls the tendency for the quantity supplied to be higher when the price is higher * this law implies that supply curves slope upward Tip for remembering: "Supply to the sky!" when drawing a supply curve
Ceteris Paribus
a Latin phrase that means "all other things held constant"
Price elasticity of supply
a measure of how responsive sellers are to price changes It measures the percentage change in quantity supplied that follows from a 1% change Price elasticity of supply = % change in quantity supplied / % change in price The price elasticity of supply is a positive number (of course!) The law of supply tells us price and quantity supplied move in the same direction
Julie's family is preparing for their Fourth of July cookout, so they head to the local grocery store. Among the pandemonium they are able to obtain everything on their shopping list, including hot dogs and hamburgers. In the market for hamburgers, the Fourth of July creates an increase in the _____ for hamburgers and a(n) _____ in the equilibrium price and quantity of hamburgers.
demand; increase
Malik is a local politician running for governor in his state. What role does Malik play in the market for votes?
demander not market
An individual supply curve holds other things constant
every time you draw an individual's supply curve, you are drawing this person's selling plans holding other things constant *ceteris paribus If something important changed, like the wage of workers fell, the company plans will change and individual supply curve will change Economist know that many factors other than price can influence selling plans
When your suppliers increase the prices of your inputs, they increase your _____, and this will shift your supply curve to the _____.
marginal costs; left
Mr. Lu decides that he is going to create his own country. He determines that production matters will be determined by the individuals in the market as far as all production and consumption decisions go. What kind of economy has Mr. Lu effectively created?
market
When existing businesses leave the market, the supply from these businesses needs to be subtracted from the _____. That means they reduce the total quantity supplied at each price, shifting the supply curve to the _____.
market supply; ; left
Price Elasticity of Demand
measure of how responsive buyers are to price changes. It measures the percent change in quantity demanded that follows from a 1% price change. Price Elasticity of Demand = % change in quantity demanded / % change in price
To distinguish between movements along a supply curve and shifts in supply curves, if the only thing that's changing is the price, then you're thinking about a:
movement along the supply curve.
Bundling
option to buy a set of items together as a package at a lower price than what they would pay to buy them all individually when a firm sells two or more goods as a package deal. (companies use this technique of marginal cost of the marginal benefit of producing one more item. They know that the second item will not be as beneficial as the first, therefore they will have a lower price option for buyers in that market. This will make them want to buy more since they are getting a better deal out of it.
When prices _____, new businesses may enter the market. When prices _____ some businesses may exit.
rise; fall
A market created in addition to the "official" market for a good is referred to as a _____ market.
secondary
Equilibrium Effect Increase in demand: Quantity Rises, Price Rises Decrease in demand Quantity falls, price falls Increase in Supply: Quantity Rises, Price Falls Decrease in Supply: Quantity Falls, Price Rises
shifts in demand cause price and quantity to move in the same direction shifts in supply causes price and quantity to move in opposite directions
Elastic versus inelastic price elasticity of demand
Elastic: when the absolute value of the percent change in quantity is larger than the absolute value of the percent change in price Inelastic: when the absolute value of the percent change in quantity is smaller than the absolute value of the percent change in price. The absolute value of the price elasticity is greater than 1 |%^Q| > |%^P| implies |%^Q| / |%^P| The absolute value of the price elasticity is less than 1
Krishan goes to a local bank to make a deposit in his savings account. While there, he considers the principles of economics that he has been learning at the university. He concludes that in this situation he is a supplier of credit. How is this so?
He is supplying the bank with his savings, which the bank will in turn lend out to other borrowers The bank is now more "trusting" of him, because he has more money stored with them. WRONG
Key Take-aways
Price elasticity of supply -> how sellers respond to a change in price. Elastic supply - sellers are very responsive to changes in price - visually, elastic supply curves are relatively flat - seller has flexibility regarding production Inelastic Supply - sellers are not responsive to changes in price visually, inelastic supply curves are relatively steep - seller does not have flexibility regarding production Elasticity calculations - use the midpoint formula when calculating percentage changes
The Market Supply Curve is Upward Sloping
Reason 1: Because the market supply curve is made from adding up individual supply curves at each price, it inherits many of the same characteristics Law of Supply: a higher price leads businesses to supply a larger quantity Reason 2: a higher price means that it is more profitable to be a supplier in that industry. * current suppliers produce more units, * new suppliers enter the market Lower prices means it's less profitable to be a supplier
Take-away
The same rise in price caused total revenue to fall in the elastic case, and rise in the inelastic case. How can you (as a seller) increase your total revenue? It depends on how elastic the demand for your product is! Elastic demand: If the demand curve for your product is relatively elastic, then you should lower the price of your good to increase your total revenue Inelastic demand: If the demand curve for your product is relatively inelastic, then you should raise the price of your good to increase your total revenue
Diamond-Water Paradox
although water is more useful, for survival than diamonds, diamonds command a higher price in the market.
How realistic is the theory of supply
as sellers experiment, they may come to act as if they follow the core principles * produce a bit more or a bit less each week to see how it affects their profits * eventually land on the profit-maximizing quantity - end up making the same supply choices if they were following the rational rule for sellers Thinking through the principles provides useful advice and helpful forecasts * rational rule guides sellers toward decisions that earn the largest possible profit If you understand how sellers are thinking, then you can better forecast their decions In perfectly competitive markets, sellers are price-takers
NOTICE
because many other competitors provide the same product, that is why the price cannot be the price the supplier wants it to be. Identical goods mean competition
A market is any setting that brings together potential _____ and _____.
buyers; sellers
Income elasticity of demand
percent change in quantity demanded / percent change in income
Cross-price elasticity of demand
percentage change in quantity demanded / percent change in price of another good
The supply curve is upward-sloping because:
the marginal cost curve is upward-sloping. Supply Curve = Marginal cost = variable cost Price = marginal cost
Equilibrium Quantity
the quantity demanded and supplied in equilibrium
All of these are considered "prices" in a market EXCEPT:
the quantity of shirts at a store
Total revenue
the total amount you receive from buyers, which is calculated as price x quantity
What does the shaded area in the graph below represent?
total revenue
Individual Supply
what you sell at each price
Law of Demand
when prices fall, the quantity demanded will rise
Equilibrium
where supply and demand meet the point where there is no tendency for change quantity supplied equals quantity demanded no surplus or shortage
Percent change in price
{(P2-P1 )/ [(P2+P1)/2]} x 100
Percent change in quantity supplied
{(Q2-Q1 )/ [(Q2+Q1)/2]} x 100