Studied by 26 people
Law of Demand
as the price of good or service increases, quantity demanded decreases, and vice versa
relationship between price and quantity demanded
demand curves
inverse relationship - curve slopes downward
change of price in exact product does not shift curve, only causes movement on existing curve
use demand schedule to create curve
substitute goods
two alternatitve goods that can be used for the same purpose
have opposite demands. as one increases demand, the other decreases
consumers go for cheaper substitute
complement goods
goods that are bought and used together
have joint demand. as one increases demand, the other also increases, and vice versa
Any factor other than _______ will shift the demand curve
price of a product
increase in demand shifts curve to the ______
right
decrease in demand shifts curve to the ____
left
Law of Supply
as the price of a good or service increases, the quantity supplied will also increase, and vice versa
relationship between price and quantity supplied
supply curves
direct relationship - curve slopes upward
change of price in exact product does not shift curve, only causes movement on existing curve
use supply schedule to create curve
Any factor that _______ cost of production decreases overall supply
increases
Any factor that ______ cost of production increases overall supply
decreases
Any factor other than ______ will shift the supply curve
price of the product
increase in supply shifts curve to the _____
right
decrease in supply shifts curve to the ____
left
price elasticity of demand
measures strength of consumer response to change in the price of the product, or how likely we are to respond to a change in price
price elasticity of demand formula
% change in quantity demanded/% change in price
drop the negatives!
interpreting price elasticity of demand and supply
if answer is:
>1, it is elastic
<1, it is inelastic
=1, it is unitelastic
total revenue formula
price x quantity demanded
price and total revenue move in opposite directions
PE of demand is elastic
price and total revenue move in opposite directions
PE of demand is inelastic
total revenue is unaffected by a change in price
PE of demand is unitelastic
determinants of price elasticity of demand
presence of substitutes (more subs = more elastic)
amount of income spent (more spent = more elastic)
nature of good/service (necessities = inelastic, wants = elastic)
income elasticity of demand
price elasticity of supply
indicates how strongly producers of a good respond to change in price
price elasticity of supply formula
% change in quantity supplied/% change in price
income elasticity of demand
measured by percent change in quantity demanded divided by change in consumer income
used to determine whether a good is normal or inferior
income elasticity of demand formula
% change in quantity demanded/% change in income
keep negative signs!
income elasticity coefficient positive
normal good
income elasticity coefficient negative
inferior good
cross price elasticity of demand
measured by percent change in quantity demanded of one good divided by percent change in price of another good
used to determine if goods are substitutes, complements, or not related
cross price elasticity formula
% change in quantity demanded of Good A/% change in price of Good B
cross price elasticity coefficient positive
goods are substitutes
cross price elasticity coefficient negative
good are complements
market equilibrium
condition in a market where quantity supplied equals quantity demanded at an optimal price
where supply and demand curves meet
consumer surplus
difference between amount consumers are willing to pay vs total amount they actually pay
two types: individual consumer surplus and total consumer surplus
individual consumer surplus
difference between a buyer’s max price and what market price is
total consumer surplus
all individual CS added together
identified on supply and demand graph as the triangle above the equilibrium price
formula: ½BH
producer surplus
difference between total amount firms are willing and able to sell for and total amount they actually received when selling
two types: individual producer surplus and total producer surplus
individual producer surplus
difference between seller’s minimum price and the equilibrium price that good/service is sold for in the market
total producer surplus
composed of all indiv. PS added up
identified on supply and demand curve as the triangle below equilibrium price (because cost of producing is lower than what is received from selling)
formula: ½BH
When does market surplus occur?
when quantity supplied is greater than quantity demanded
When does market shortage occur?
when quantity demanded is greater than quantity supplied
Four potential shifts in equilbrium
increase demand shifts curve right
decrease demand shifts curve left
increase supply shifts curve right
decrease supply shifts curve left
price ceiling
located below equilibrium
government intervention to keep prices low for consumers
causes shortages because supply line is crossed before demand line (calculate by QD - QS)
price floor
located above equilibrium
government intervention to keep market from charging too low
causes surpluses because demand line is crossed before supply line (calculate by QS - QD)
subsidy
grants from the gov’t as an effort to increase production of a good/service
increases supply and shifts supply curve right
excise tax
tax by gov’t on goods/services deemed to have negative effect on society
decreases supply and shifts supply curve left
tax incidence
helps determine who will bear burden of paying excise tax
demand and supply elastic = tax is evenly split for producers and consumers
demand is more elastic = producers pay more of the tax
demand is more inelastic = consumers pay more of the tax
deadweight loss
total amount of CS and PS lost due to market inefficiency
formula: ½(change in quantity)(change in price)
find deadweight CS, then deadweight PS, then add together for total DWL
international trade
allows countries to expand markets and supply goods that aren’t available domestically
increases variety of goods/services while creating a sense of competition, which lowers prices for consumers
cheaper to trade than produce domestically
public policy
laws and regulations that govern economic activity
ex: quotas and tariffs
quotas
gov’t imposed limitations on production levels
often used as a trade barrier to protect domestic industries producing same product
tariffs
taxes on foreign goods coming into the country
reduce amount of good coming to a country by raising the price of the good
When is total economic surplus maximized?
at equilibrium
Note 
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