Demand and Supply Curves: Elasticity, Consumer Surplus, and Market Dynamics

Effect of Price Decrease

As the price of a good decreases, buyers buy more of it.

Consumer Reaction to Price Increase

Consumers will substitute other goods like margarine for the more expensive butter.

Consumer Surplus Calculation

Katie ($100), Kendra ($95), Kristen ($80) each buy at $80. Consumer surplus is $35.

Demand Curve

The curve that shows the relationship between the price of a good and the quantity that consumers are willing to purchase at each price.

Point on the Demand Curve

Indicates the quantity demanded at that price.

Law of Demand

States that if product price increases, quantity demanded will decrease.

Height of the Demand Curve

Indicates the maximum price consumers are willing to pay for an additional unit of it.

Consumer Surplus

The difference between the amount consumers would be willing to pay and the amount they actually pay for a good.

Consumer Surplus from CD Player

Shannon receives consumer surplus of $25 if her willingness to pay is $160.

Consumer Surplus from Laptop

Andrew would pay $3,000 for a laptop and gets $700 consumer surplus, meaning he paid $2,300.

Effect of Price Increase on Consumer Surplus

Consumer surplus decreases if the price of a good increases.

Effect of Lemon Crop Freeze on Consumer Surplus

Consumer surplus decreases due to an early freeze in California reducing lemon crop.

Demand Curve Sensitivity

If purchases are highly sensitive to price, the demand curve is relatively flat (more horizontal).

Elastic Demand

If consumer purchases are highly sensitive to price, demand is elastic.

Elasticity of Demand

If demand for a good is relatively elastic, this means purchases are highly sensitive to price.

Price Increase Effect on Demand

If price rises, demand does not change.

Price Increase Effect on Quantity Demanded

If price rises, quantity demanded decreases.

Decrease in Demand

When economists say demand has decreased, they mean the demand curve shifted left.

Increase in Quantity Demanded

When economists say Qd has increased, they mean price fell, consumers buy more.

Correct Use of Demand vs. Qd

Both statements I and II are correct.

Decrease in Tomato Juice Price

Results in an upward movement along the demand curve.

If people expect coffee prices to rise next month

demand for coffee will increase now

Which would increase demand for computer software?

decrease in price of personal computers

Increase in consumer income

demand for automobiles shifts right

Decrease in income for a typical product

causes demand to decrease (shift left)

Which would increase demand for fast food in Houston?

increase in Houston's population

If # of consumers increases

the demand curve shifts right

Two goods are substitutes if

↑ price of one → ↑ demand for the other

An increase in price of a good normally increases

demand for substitutes

If coffee price decreases

demand curve for tea shifts left

Which would decrease demand for DVD players?

increase in TV prices (a complement)

If coffee and cream are complements

↑ price of coffee causes demand for cream ↓

If widgets fall in price → gadgets demand ↑

then widgets & gadgets are complements

↑ expected future price of a good

causes current demand to increase (shift right)

If firms announce price cuts next month

current demand for computers decreases

As elderly consumers ↑ and young ↓

we expect both ↑ demand for medical services and ↓ demand for blue jeans

Opportunity cost of production differs because it includes

opportunity cost of owned resources

If a firm isn't covering all costs

long run it will go out of business

Economic profit means firm is

increasing the value of resources used

Law of supply

More supplied as price rises

Height of supply curve at Q = 100

minimum price to supply 100th unit

If demand for nachos ↑

producer surplus increases

Bill willing to mow lawns for $200 but paid $250

This is producer surplus

Harry would sell crop for $20,000 but gets $25,000

Producer surplus = $5,000

Supply highly sensitive to price is shown by

supply curve flat

If supply is highly sensitive to price

it is elastic

If supply is relatively inelastic

this means quantity supplied not very sensitive to price

Large % price increase → small % increase in Qs

means supply is relatively inelastic

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