Econ

If price increases

Quantity demanded decreases

If price decreases

Quantity demanded increases

As prices rise (supply)

quantity supplied increases so the supply curve is sloping up

Perfectly competitive markets

firms all produce the same thing and each firm is too small to influence the price of a product, ex: wheat

Fixed costs

don’t depend on quantity supplied

Variable costs

depend on quantity supplied

Law of decreasing marginal product

if you add more inputs to a fixed size firm, eventually the additional inputs will make less output

Law of diminishing marginal utility

as we consume more of one thing, we get less additional benefit from each marginal unit

Law of demand

the total quantity demanded is higher when the price is lower

Surplus

excess supply = decrease in price

Shortage

excess demand = increase in price

Demand increases (shifts out)

equilibrium price and quantity will RISE

Demand decreases (shifts back)

equilibrium price and quantity will FALL

Supply increases

equilibrium price will FALL but quantity will RISE

Supply decreases

equilibrium price will RISE but quantity will FALL

If supply and demand decrease

equilibrium quantity will FALL but effect on price is unknown

If supply and demand increase

equilibrium quantity will RISE but effect on price is unknown

If supply decreases and demand increases

equilibrium price will RISE but effect on quantity is unknown

If supply increases and demand decreases

equilibrium price will FALL but effect on quantity is unknown

If both curves shift in the same direction

then quantity always moves in the same direction (if both increase, Q increases)

If curves shift in opposite directions

then price always changes (shortage/surplus)

Price elasticity of demand

% change in demand / % change in price

Elastic Demand (definition)

goods with lots of alternatives, luxuries

Inelastic Demand (definition)

goods with no good substitutes, necessities

Elastic Demand

% change in quantity > % change in price

absolute value of price elasticity is > 1

quantity is very responsive to changes in price

Flat curve

Inelastic Demand

% change in quantity < % change in price

absolute value of price elasticity < 1

Quantity is not responsive to changes in price

Steep curve

What should the seller do to increase their profits if their demand is inelastic?

Increase prices

What should the seller do to increase their profits if their demand is elastic?

Decrease prices

Cross price elasticity

% change in quantity demanded / % change in price of another good

Income elasticity

% change in quantity demanded / % change in income

If the cross-price elasticity is positive

substitute

If the cross-price elasticity is negative

complement

If the income elasticity is positive

normal goods (new clothing, cars, and fine dining)

If the income elasticity is negative

inferior goods (ramen, used cars)