econs topics 1-5

normal goods

qd increase when income increase - things you buy more when income increase e.g. upgrade from louis to hermes

inferior goods

qd decrease when income increase - things you buy less when income increase e.g. 2 min noodles

substitute goods

increase in price of x = decrease qd for x, increase d for y bc y becomes relatively cheaper. demand for goods x and y are positively related

complement goods

increase in price of x = decrease qd for x and y. demand for goods x and y are negatively related

expectations of future buyers

if buyers expect p to increase in future, they buy as much as they can asap - increasing d now e.g. house

congestion effects

when a good becomes less valuable due to being bought by more ppl e.g. luxury goods - you want less ppl to buy bc exclusivity

network effects

when a good becomes more valuable due to being bought by more ppl e.g. labubu

non price determinants of demand

income of buyers, tastes and pref, price of related goods, expectations of future price changes, congestion and network effects, number of consumers in the market

non price determinants of supply

weather, input prices, changes in tech, prices of substitutes in production, expected future prices, type and number of firms in market

consumer surplus

difference between max price a consumer is willing to pay for a good and the price actually paid for the good. measures net benefit to the consumer. area above the price and below the demand curve.

producer surplus

difference between lowest price seller is willing to sell and the price actually received for that good. measures the net benefit to the seller. area below the price and above the supply curve.

total surplus

maximised when market in equilibrium. MB = MC

price ceiling

draw under equilibrium

price floor

draw above equilibrium. price increase, demand decrease, supply increase bc producers have more of an incentive to produce, surplus develop.

tax

an artificial added cost which drives a wedge between price paid by buyers and price received by sellers. sellers receive less than they do in a free market and buyers pay more so both lose.

subsidy

artificial added benefit which drives a wedge between price paid by buyers and price received by sellers. sellers receive more than they do in a free market and buyers pay less so both benefit.

productive efficiency

when producers produce at lowest cost

dynamic efficiency

firms are wiling and able to continually improve production processes and products

elasticity of demand

measures how sensitive quantity demanded is to changes in price. thus Ed = %change Qd div %change in P

price elasticity of demand ratios

Ed > 1 - consumers are price sensitive like an elastic band, flatter slope. Ed < 1 - consumers not very price sensitive, steep slope. Ed = 0 - perfectly elastic demand. ed is infinity - perfectly inelastic demand.

midpoint formula

(change in q div change in p) times ((average of the two prices) div (average of the two quantities)

determinants of price elasticity of demand

availability of close substitutes, time, necessities vs luxuries, definition of market, share of income spent on good

if Ed = 1

unit elastic demand. %change in Q = % change in P hence change in P won’t affect TR. gain from higher revenue per unit sold is exactly balanced out against the loss from the lower volume of sales

income elasticity of demand

measures how sensitive demand is to changes in income. %change in Qd div %change in I.

cross price elasticity of demand

measures how sensitive demand for one good is to changes in price of a related good

price elasticity of supply

measures how sensitive supply is to changes in price of a good. reflects how quickly producers can change Qs in response to changes in price. %change in Qs div %change in P.

Es = 0

perfectly inelastic. firms are unable to change Qs bc doesn’t matter what price is, we can’t move supply beyond a certain point e.g. ppl hungry and want to pay a lot for sandwiches but cafe can’t make more so have to wait till tmr

0 < Es < 1

inelastic. firms are able to change Qs a little

Es = 1

unit elastic. firms are able to change Qs moderately

Es > 1

elastic supply. firms are able to change Qs easily and quickly in response to price change

Es = infinity

perfectly elastic. horizontal supply curve.

determinants of Es

time, cost of input

total tax revenue

(diff between buyer price and seller price) x quantity traded

steeper demand curve in relation to tax

relatively greater burden of the tax is borne by buyers compared to sellers