equilibrium / surplus and shortage

what do consumers want to do with their costs and what do producers want to do with their profits?

• consumers want to minimize costs

• producers want to maximize profits

what are prices determined by? what is equilibrium?

• prices are determined where supply meets demand

• equilibrium is achieved by the supply curve hitting the demand curve

define market equilibrium, and how are the two factors determined

• equilibrium price: quantity supplied = quantity demanded, when supply and demand meet so no surpluses or shortages are caused

• equilibrium quantity: the quantity of goods sold at equilibrium price

what happens when equilbrium changes

can be due to shifts in the supply and demand curve

define shortages

• exists when the quantity demanded is greater than the quantity supplied

• Qd > Qs

• occurs when price is set below the equilibrium price

define surpluses

• exists when the quantity supplied is greater than the quantity demanded

• Qs > Qd

• occurs when price is set above the equilibrium price

elasticity of demand, what is the difference between elastic and inelastic + example? What will happen to the quantity demand of both if price changes?

• a measure of how consumers react to a change in price

• inelastic: demand for a good that consumers will continue to buy despite a price increase

  • medicine, like insulin, it is a essential to health for diabetics

  • creates no or small change in quantity demanded

• elastic: demand that is very sensitive to changes in price

  • when a restaurant meal increases from $15 to $20, so demand decreases bc people can dine elsewhere

  • creates a large change in quantity demanded

what is the unitary elastic? what percentages equal each other

• the condition where something is neither elastic or inelastic

• the percentage change in price is equal to the percentage change in quantity demanded

  • if the price goes up 10%, you buy 10% less

  • if the price goes down 8%, you buy 8% more

what factors cause elasticity

1. availability of substitutes: the more substitutes a product has, the more elastic tis demand will be because when the price of the product rises, consumers can switch to a substitute.

2. relative importance: the demand is how much of your budget you spend on the good, high price creates a higher chance of being elastic

3. necessities vs luxuries: whether a person considers a good to be a necessity or a luxury has a great impact on the good’s elasticity of demand for that person. Necessities are inelastic while luxuries are elastic

4. change over time: demand sometimes become more elastic over time (long term) because people can eventually find substitutes

   1. ex: gas can be inelastic short term for daily commutes but in the future, it can become elastic because of fuel efficient transportation

what is the PED? what is it the ratio of changes? What happens if the price of the good goes up?

• PED: price elasticity of demand, the responsiveness of quantity demanded to a change in price

• the ratio of changes of two variables (price and quantity demanded) that move in opposite directions

• if the price goes up, then the quantity demanded goes down and vice versa

what is the formula for the PED

PED = (% change in Qd)/(% change in P)

What happens if:

PED > 1

0 < PED < 1

PED = 1

PED = 0

PED → infinity

PED > 1: demand is price elastic

0 < PED < 1: demand is price inelastic

PED = 1: demand is unitary elastic

PED = 0: demand is perfectly inelasticity (no change in QD)

PED → infinity: demand is infinitely elastic (small price change creates infinitely large change in QD)