ECON 101

Postulates of Human Behavior

Fundamental ideas derived from observation about how individuals make choices and interact, essential for understanding economic behavior.

Preferences

The various choices that consumers make between different goods and services, which can vary significantly from person to person based on individual tastes and circumstances.

Law of Demand

This economic principle states that, all else being equal, as the price of a good decreases, the quantity demanded increases, and vice versa, reflecting an inverse relationship.

Demand Curve

A graphical representation illustrating the relationship between the price of a good and the quantity demanded by consumers at various price levels, typically downward sloping. MV

The Demand Schedule

A table that lists different prices for a good along with the corresponding quantities that consumers are willing to buy at those prices, providing a clear view of demand at specific price points.

Marginal Value

The incremental satisfaction or utility gained from consuming one additional unit of a good, reflecting the concept of diminishing returns as consumption increases.

Consumer Surplus (CS)

This economic measure represents the difference between the maximum price consumers are willing to pay for a good versus the actual price they pay, indicating the benefit gained by consumers.

Total Expenditure (TE)

The total amount of money spent by consumers on a good, calculated by multiplying the price of the good by the quantity purchased, showcasing consumer spending behavior.

Law of Diminishing Marginal Value

An economic principle suggesting that as a person continues to consume a good, the additional satisfaction obtained from each successive unit decreases.

Supply Curve

A graphical representation that shows the relationship between the price of a good and the quantity that producers are willing to sell at each price level, typically upward sloping. MC

Marginal Cost (MC)

The additional cost incurred from producing one more unit of a product, critical for understanding production efficiency and pricing strategies.

Producer Surplus (PS)

This measure indicates the difference between the price that producers receive for a good and the marginal cost of producing that good, reflecting producer benefit in the market.

Market Equilibrium

The condition that occurs in a market when the quantity supplied equals the quantity demanded, typically represented by the intersection of the supply and demand curves.

Price Ceiling

A government-imposed limit on how high a price can be charged for a good, which can lead to shortages if set below the market equilibrium price.

Price Floor

A government-established minimum price that must be paid for a good, effective only if set above the equilibrium price, potentially leading to surpluses.

Deadweight Loss

The loss of economic efficiency that occurs when the equilibrium quantity of goods traded is not achieved, resulting in lost welfare to both consumers and producers.

Elasticity of Demand

A measure that indicates how responsive the quantity demanded of a good is to a change in its price, reflecting consumer sensitivity to price fluctuations.

Positive Cross Price Elasticity

Indicates that two goods are substitutes; as the price of one rises, demand for the other increases due to their interchangeable nature.

Negative Cross Price Elasticity

Indicates that two goods are complements; as the price of one rises, the demand for the other decreases, as they are typically consumed together.

Total Revenue

The total sales output of a good or service, calculated by multiplying the price of the product by the quantity sold, serving as a key indicator of business performance.

Economic Efficiency

The state achieved when all potential benefits from trade are realized, ensuring that resources are allocated in a way that maximizes total net benefits to society.

Quantity Demanded vs. Demand

Quantity demanded refers to the specific amount consumers are willing to purchase at a given price, whereas demand represents the full range of quantities at all possible prices.

Shifts of the Demand Curve

Changes in demand can result in a rightward or leftward shift of the demand curve due to factors such as income changes, consumer preferences, or changes in the prices of related goods.

Competition

The dynamic rivalry among sellers in a market as they strive to attract customers, often leading to innovations, lower prices, and improved services.

Market Structure

The characteristics of a market that determine the degree of competition among producers and the pricing strategy, including the number of firms, types of products, and barriers to entry.

Perfect Competition

A theoretical market structure where a large number of firms sell identical products, leading to no single firm having the power to influence market prices.

Monopoly

A market structure characterized by a single seller who controls the entire market for a good or service, often leading to higher prices and reduced consumer choices.

Oligopoly

A market structure featuring a small number of firms, where each firm's decisions are interdependent, typically leading to collective pricing strategies and market control.

Market Power

The ability of a firm or group of firms to influence or control the price and supply of a good or service in a market, often due to a lack of competition.

Price Discrimination

The strategy of charging different prices to different consumers for the same good or service, based on varying willingness to pay, enhancing profitability.

Natural Monopoly

A monopoly that arises due to high fixed costs or startup costs, making it more efficient for a single provider to supply the entire market rather than having multiple competitors.

Barriers to Entry

Obstacles that make it difficult for new competitors to enter an industry, which may include high startup costs, regulations, and strong brand loyalty among consumers.

Consumer Choice Theory

An economic theory that analyzes how consumers allocate their income across various goods and services to maximize their overall satisfaction or utility.

Shifts of the Supply Curve

Changes in supply can result in a rightward or leftward shift of the supply curve caused by factors like input costs, technology advancements, or changes in the number of producers.

Supply Schedule

A table that displays the various prices of a good along with the corresponding quantities that producers are willing to sell at those prices, illustrating supply conditions effectively.

Individual Supply Curve

A graphical representation that shows the relationship between the price of a good and the quantity that a single producer is willing to supply at different price levels.

Market Supply Curve

The market supply curve is the horizontal sum of the individual supply curves of all firms in that market, representing the total quantity supplied by all producers at each price level.

Quantity Supplied vs. Supply

Quantity supplied refers to the specific amount that producers are willing to sell at a given price, while supply represents the overall relationship between price and the quantity supplied at various price levels.

Equilibrium

The condition in a market where the quantity supplied equals the quantity demanded, leading to a stable price and quantity in the market.

Market Clearing Price

The price at which the quantity demanded (QD) equals the quantity supplied (QS), ensuring that all goods produced are sold without surplus or shortage.

Price Elasticity of Demand

A measure of the responsiveness of quantity demanded (QD) to changes in price, indicating how much demand will change with a price variation.

Income Elasticity of Demand

The measure of the responsiveness of quantity demanded to changes in consumer income, reflecting whether a good is a luxury or necessity.

Cross Price Elasticity of Demand

A metric that measures the responsiveness of quantity demanded to changes in the price of related goods, indicating whether goods are substitutes or complements.

Price Elasticity of Supply

The measure of responsiveness of quantity supplied to changes in price, showing how producers react to price fluctuations.

Calculating using the Midpoint Method

A method to calculate elasticity that uses the average of the starting and ending prices and quantities to provide more accurate elasticity estimates. he midpoint formula for calculating elasticity is given by: Ed=(Q2−Q1)/(Q1+Q2)2(P2−P1)/(P1+P2)2Ed=(P2−P1)/2(P1+P2)​(Q2−Q1)/2(Q1+Q2)​​ where $Q1$ and $Q2$ are the initial and new quantities, and $P1$ and $P_2$ are the initial and new prices.

Elastic Demand

Characterized by elasticity values in the range of -infinity < E < -1, indicating that consumers are highly responsive to price changes, resulting in significant shifts in quantity demanded.

Unit Elastic Demand

Occurs when E = -1, denoting that the percentage change in quantity demanded is equal to the percentage change in price, leading to no overall impact on total revenue.

Inelastic Demand

Indicated by elasticity values -1 < E < 0, meaning consumers are less responsive to price changes, resulting in a stable quantity demanded despite price fluctuations.

Elasticity and Steep Demand Curves

Steeper demand curves indicate more inelastic demand, showing that consumers are less sensitive to price changes, leading to smaller shifts in quantity demanded for large price changes.

Elasticity and Flat Demand Curves

Flatter demand curves indicate more elastic demand, meaning that consumers are highly sensitive to price changes, resulting in larger shifts in quantity demanded for small price variations.

Determinants of Price Elasticity of Demand

Factors that affect price elasticity of demand include the availability of substitutes and the time period consumers have to adjust their behavior in response to price changes.

Elastic Demand and Total Revenue

If demand for a good is elastic (price elasticity of demand < -1), an increase in price reduces total revenue, as the unitary effect is stronger than the price effect.

Inelastic Demand and Total Revenue

If demand for a good is inelastic (price elasticity of demand between 0 and -1), an increase in price increases total revenue, as the price effect is stronger than the quantity effect. Examples include necessities like gas or coffee.

Unit-Elastic Demand and Total Revenue

If demand for a good is unit-elastic (price elasticity of demand = -1), an increase in price doesn’t change total revenue, as the quantity effect and the price effect offset each other.

Income Elasticity of Demand

The percent change in the quantity demanded of a good when a consumer's income changes, divided by the percent change in the consumer's income. IED = \frac{\% \text{ change in QD}}{\% \text{ change in income}}.

Normal Good

A good with a positive income elasticity of demand; when income increases, the quantity demanded at any given price also increases. If IED > 1, it is income elastic; if 0 < IED < 1, it is income inelastic.

Inferior Good

A good with a negative income elasticity of demand; as income increases, the quantity demanded at any given price decreases.

Cross Price Elasticity of Demand (CPE)

Measures the effect of a change in the price of one good on the quantity demanded of another good. CPE = \frac{\% \text{ change in QD of Good A}}{\% \text{ change in price of Good B}}.

Substitutes

Goods that are substitutes have a positive cross price elasticity of demand; an increase in the price of one leads to an increase in the demand for the other.

Complements

Goods that are complements have a negative cross price elasticity of demand; an increase in the price of one leads to a decrease in the demand for the other.

Price Elasticity of Supply (PES)

A measure of the responsiveness of quantity supplied to the price of a good; it is the ratio of the percent change in quantity supplied to the percent change in price. PES = \frac{\% \text{ change in quantity supplied}}{\% \text{ change in price}}.

Availability of Inputs

The price elasticity of supply tends to be larger when inputs are readily available for production; it is smaller when inputs are difficult to obtain.

Time Factor in PES

The price elasticity of supply tends to grow larger as producers have more time to adjust to price changes, with long-run elasticity often higher than short-run elasticity.

Perfectly Inelastic Supply

Occurs when the price elasticity of supply is 0; a vertical supply curve indicates that changes in price have no effect on quantity supplied.

Perfectly Elastic Supply

Occurs when price elasticity of supply is infinite; a horizontal supply curve indicates even a tiny price change will lead to significant changes in quantity supplied.

Opportunity Cost

The loss of potential gain from other alternatives when one alternative is chosen. It reflects the trade-off in choosing one option over another.

Normative

economic statements that express opinions about what ought to be, involving value judgments.

Positive

economic statements that are factual and can be tested or validated, focusing on what is rather than what ought to be.

Price Effect

refers to the impact on total revenue caused by the change in the price per unit itself. Area of the rectangle touching y-axis.

Quantity Effect

refers to the impact on total revenue caused by the change in the number of units sold ($Q$) as a result of the price change. Because of the Law of Demand, price and quantity move in opposite directions. Area of rectangle touching x-axis

Non-price Rationing

occurs when goods are allocated based on criteria other than price, such as waiting lists or first-come, first-served systems, often used in markets where prices are controlled.

Tax Revenue

The income generated from taxes imposed by the government on income, sales, or property. It is an essential source of funding for public services and infrastructure. tax rate*quantity sold

Who pays for taxes - depends on elasticity

Inelastic: consumers pay more, suppliers pay less, Elastic: consumers pay less, suppliers pay more