Microeconomics Chapter 3, 4, 5

Relatively Elastic (Demand)

-1>E(d)>-infinity

Income Elasticity for Necessities

0<E(i)>1

Relatively Inelastic (Supply)

0<E(s)<1

Relatively Inelastic (Demand)

0>E(d)>-1

Factors that Shift Demand

1. Buyers income 2. Preference 3. Price of related goods 4. Future price 5.Number of buyers

Factors that Shift Supply

1. Cost of inputs change 2. Change in technology or production process 3. Taxes and Subsidies 4. Anticipated future prices 5. Number of firms in the industry

Factors of Price Elasticity of Demand

1. Substitutes 2. Share of the budget 3. Necessity vs. Luxury 4. Time

Total Revenue

=Price X Quantity

Total Profit

=Revenue-Costs

Long Run

A period of time when consumers can fully adjust to market conditions (elastic)

Rent Control

A price ceiling that applies to the housing market

Change in Price (Supply)

A price change is the only thing that can cause moment up and down the supply curve.

Supply Schedule

A table of the relationship between the price of the good and the quantity supplied at that price

Demand Schedule

A table that shows the relationship between the price of a good and the quantity demanded

Normal Good

Consumers buy more of this type of good as income rises, holding all other things constant

Black Markets

Illegal markets that arise due to price controls

Demand Curve

Is a graph of the relationship between the prices in the demand schedule and the quantity demanded at those prices

Imperfect Market

Is one where either the buyer or the seller has influence on the market price.

Quantity Demanded

Is the amount of a good or service that buyers are willing and able to purchase at the current price

Elasticity

Is the measure of the responsiveness of buyers and sellers to a change in price or income

Market Demand

Is the sum of all the individual quantities demanded by each buyer in the market at each price

Price Gouging Laws

Laws that place temporary price ceilings on the prices that sellers can charge during time of emergency (creates a shortage)

Price Ceilings

Legally established maximum prices for goods and services

Price Floors

Legally established minimum prices for goods and services

When the price elasticity demand is elastic doing ______ will increase revenue

Lowering the price (Demand)

Normal Goods have two catagories

Luxuries and Necessities

Increasing Demand

Means a shift in the demand curve to the right or left

Income Elasticity of Demand

Measure how a change in income affects spending

Price Elasticity of Demand

Measure the responsiveness to the quantity demanded to a change in price

Cross-Price Elasticity

Measures the responsiveness or the quantity demanded of one good to a change in price in another

Short Run

More elastic then immediate run, Consumers can partially adjust their behavior

Inelastic

No response to price change (Price does not matter)

Immediate time

Not very elastic, There is no time for consumers behaviors to change

Equilibrium

Occurs at the point where the demand curve and the supply curve intersect

Market Economy

Resources are allocated among households are firms with little to no interference from the government.

Elastic

Responsiveness to price change (Price Matters)

Effect of Binding Price Floors

SR: Creates a surplus, smaller demand, lower black-market price LR: The surplus increase, demand becomes more elastic (and smaller), substitutes are found

Effect of Binding Price Ceilings

SR: Shortages, Blackmarkets LR: Incr. Shortages, consumers find alternatives

Law of Supply

States that all other things being equal, the quantity supplied will rise as the price rises and falls when the price of the good falls

Law of Supply and Demand

States that the market price of any good will adjust to bring the quantity supplied and the quantity demanded into balance

Law of Demand

States that, all other things being equal, quantity demanded falls when the price rises and rises when the price falls

Equilibrium Quantity

The amount at which the quantity supplied is equal to the quantity demanded

Quantity Supplied

The amount of a good or service that producers are willing and able to sell at the current price

Supply Curve

The graph that shows the relationship between the prices in the supply schedule and the quantity supplied at those prices

Minimum Wage

The lowest hourly wage that firms can legally pay their workers

Price Elasticity of supply

The measure of the responsiveness of the quantity supplied to a change in the price (Always consider the run)

Share of the Budget (Details)

The more expensive a good the more elastic

Change in Price (Demand)

The only thing that can cause movement along the demand curve

The Equilibrium Price

The price at which the quantity supplied is equal to the quantity demanded, this is also known as the market clearing price.

Market Supply

The sum of the quantities supplied by each seller in the market at each price

Inferior Good

This good is purchased out of necessity rather then choice

Substitutes

Two goods that are used in place of each other. When the price of a good rises the quantity demanded of the other goes up.

Compliments

Two goods that are used together. When the price of one good rises, the demand for the other good goes down

Elastic (Supply)

When supply is able to respond to a change in price

Inelastic (Supply)

When supply is unable to respond to a change in price

Binding Price Celling

When the market price is above the ceiling

Nonbonding Price Floors

When the market price is above the floor

Binding Price Floors

When the market price is below the floor

Nonbonding Price Celling

When the price ceiling is above market price.

Shortage

When the quantity demanded is greater the quantity supplied

Surplus

When the quantity supplied is greater the quantity demanded

Time

With an increase of ________ elasticity grows

As income rises....

As ______ rises so does the demand for necessities and luxuries

Price Controls

Attempts to set prices on goods and services by government involvement in the market

Cross Price Elasticity of Complimentary Goods

E(c)<0

Cross Price Elasticity of Unrelated Goods

E(c)=0

Cross Price Elasticity of Substitutes

E(c)>0

Price Elasticity of Demand Formula (Words)

E(d)= Percent change in Q demanded / Percent Change in Price

Price Elasticity of Demand Formula (Equation)

E(d)=(Q2-Q1)/(Q2+Q1/2) / (P2-P1)/(P2+P1/2)

Unitary (Demand)

E(d)=-1

Perfectly Inelastic (Demand)

E(d)=0

Perfectly Elastic (Demand)

E(d)>-infinity

Income Elasticity for Inferior Goods

E(i)<0

Income Elasticity for Luxuries

E(i)>1

Perfectly Inelastic (Supply)

E(s)=0

Relatively Elastic (Supply)

E(s)>1

Monopoly

Exists when a single company supplies the entire market for a particular good or service

Competitive Market

Exists when there are so many buyers and sellers that each has only a small impact on the market price and output