Unit 2 - Supply and Demand

what is the basis for understanding how markets work?

the supply and demand model

what are the basic assumptions for demand?

property rights, ppl respond to incentives, and people continue to face restraints

what does the demand curve look like?

downward sloping to the right

what is the law of demand?

-if price dec, demand inc

-if price inc, deman dec

-important to note this is a change in QUANTITY demanded and not solely demand

why is the demand curve a downward slope?

1) The law of diminishing returns

2) income effect

3) substitution effect

what is the law of diminishing returns?

there is less value to something if there is more of it

what is the income effect?

if smth is less expensive, you can buy more stuff. [purchasing power inc]

what is the substitution effect?

id smth is too expensive, ppl will buy smth cheaper

when do demand curves change?

if there is a change in:

-income

-prices of related goods

-complements

-taste

-expectations

-# of buyers

how does income affect demand?

if less income, demand dec

-introduce normal and inferior goods

what is a normal good?

demand falls if income falls and VV

what is an inferior good?

demand dec when income inc

how does the price of related goods affect demand?

the fall of one good's price reduces demand for another substitute good

-this often happens in pairs

how do complements affect demand curve?

the dec of price of one leads to higher-demand for the other good (ie fudge and ice cream)

how does taste affect the demand curve?

if ppl like smth, they will buy more and VV

how fo expectation affect the demand curve?

if ppl expect smh in the future they will change the demand at that moment

What is the Law of Supply?

as price inc, the quantity increase

what determine supply?

the producers and sellers

what does a supply curve look like?

slopes up to the right

when does a supply curve change?

-change in cost of production

-change in tech

-change in number of sellers

-changes in expectation

what is price elasticity of demand?

the measure of how responsive the quantity is to changes in price

what is elasticity

a measure of the responsiveness of the quantity demanded or supplied to changes in one or both demand and/or supply.

what is elastic demand

a large shift in demand for a small increase in price;

E > 1

what is inelastic demand?`

an increase in price that then results in a small decrease in the quantity demanded; E<1

what is the price elasticity of demand?

(sum of change in Qd)/(% change in P)

what is price elasticity of demand a measure of ?

how much Qd responds to a change in price

-varies along liner curve and is NOT SLOPE

What is Unit elastic?

Qd changes by the same percent as the price changes [E = 1]

what is perfectly elastic?

Qd change infinitely w/ change in price [E = infinity] [this is the horizontal line\

what is perfectly inellastic?

Qd does not change with the price change [e = 0 and the graph is vertical]

how to find total revenue?

Price x Quantity

what does the total revenue test say?

-if P inc and TR inc then inelastic

-if p dec and TR dec then inelastic

-if P inc and TR dec then elastic

-if P dec and TR inc then elastic

these are all under demand

(ess same dir means inelastic and diff directions mean elastic)

what determines the elasticity of demand?

Avail of close substitutes (if a lot then demand is elastic)

-Necessity v luxury - if good is needed, the demand is more inelastic

-% of the budget - the larger the percent of the total budget, the more elastic

-time - the longer consumers have to adjust, the more elastic the demand is

what is price elasticity of supply?

a measure of the responsiveness of the quantity supplied to a change in price

-% change in Qd/% change in P

what is the midpoint method?

(X - Xo)/(midpoint b/2 X and Xo)

-this is used to find the percentage change

what is inelastic supply?

Qs doesn't respond strongly to a change in Ep

what determine elasticity of supply?

-the price of alternative inputs: more options mean the supply is more elastic

-time : the linger producers have to adjust to price changes, the more elastic it is

what is income elasticity if Demand?

the measure of how responsive the quantity demanded is to change in income

what is the formula for income elasticity of demand?

% change in Qd/% change in income

what is income elasticity used for?

to determine if there is a positive or negative relation with IED (essentially is it normal or inferior)

when is IED positive?

-income inc

-Qd inc

Normal good

when is IED negative?

-income inc

-Qd dec

-inferior

cross price elasticity of demand?

to find whether goods are complements, substitutes, or not related.

-% change Qd of good/% in price of good y

(if + then subtitue, if - complements, and if 0 then no relation)

what does market disequilibrium mean?

it's either a shortage or surplus that is created

how does the Ep change with demand and shift change?

if D inc and S inc: Qe inc and Pe undet

-if D inc and S dec: Qe undt and Pe inc

-if D dec and S inc: Qe undt and Pe dec

-if D dec and S dec: Qe Dec and Pe undt

tariff

a tax placed on a good/service that is imported/exported

-create revenue for the domestic govt and it is smts used to influence international trade

what is an import quota?

restriction on the quantity of a good that can be imported

autarky

closed makert; econ ind; self-suficient; not engaged in trade

free market?

market that is not closed; econ dep; engaged in trade

How to find quantity imported?

Qd-Qs (at the new World Price)

How to find the tariff?

Pw + t - Pw

What doe tariffs and quotas impact?

domestic market for goods as seen trhough changes in domestic prive, quantity produced, and total economic surplues

what is supply and demand?

the behavior of ppl as they interact w/ one another

in a competitive market

market?

a group of buyers and sellers of a particular good or service

what is a competitive market?

many sellers and buyers that each had a neglibgible impact on market price`

what does it mean when something is perfectly competitive?

goods are the same and there are so many buyers and seller that the indv do not have any control

what is a pricetaker

BS that accept the market

monopoly

the seller who sets prices

what is quantity demanded?

amount buyers are willing to purchase

what is the demand schedule?

table showing the relation b/2 the price of a good and quantity demanded.

quantity supplied?

amt of seller who are willing to sell

what can affect the supply curve?

input prices - if price inc here then less supply

-tech - could reduce cost and thus lead to more produced

-expectations - depend on how much the company thinks will sell

-# of sellers -

when does a surplus exist?

when Qs > Qd

when does a shortage occur

Qd > Qs

what is consumer surplus?

Wtp - Pe

what is producer surplus?

Pe - Wts

law of supply and demand?

the price of any good adjusts to bring the Qs and Qd for that good into balance

what is total revenue?

the amount paid by buyers and received by the seller

what is a price ceiling?

legal mas on price on a good

what is a price floor?

legal min on prices

what is a quota?

restriction on the quanitity that can be sold in a market

what is a tax?

a financial charge a govt imposes on a market

excise tax?

per unit tax (ie gallon of gas)

subsidy?

financial benefit given by a govt to an indv or a business

tac incidences?

the manner in which the burden of a tax is shared among participants

payroll tax?

tax on the wages that firms pay their workers

how does elasticity impact tax incidence?

fall heavily on a less elastic market (people don't really have alternatives

welfare economics?

study of how the allocation of resources affects economic well being

cost

value of everything a seller gives up to produce a good

total surplus?

CS + PS