Chapter 3-5 (DD, SS)

Demand (definition)

The amount of goods that consumers are willing and able to buy at various prices over a given period of time, ceteris paribus

State the law of demand

In a given time period, the quantity demanded of a good is inversely related to its price, ceteris paribus

Supply (definition)

The amount of a good that producers are willing and able to sell at various prices over a given period of time, ceteris paribus

State the law of supply

In a given time period, the quantity supplied of a good is directly related to its price, ceteris paribus

Labour demand (definition)

The amount of labour that firms are willing and able to employ at the given wage, ceteris paribus

Labour supply (definition)

The amount of labour that people are willing and able to provide at the given wage, ceteris paribus

Consumer surplus (definition)

The difference between what the consumer is willing and able to pay for a good and the actual price paid for it

Producer surplus (definition)

The difference between what the producer is willing and able to accept for supplying a good and the actual price received for it

When is societal welfare maximised

When the total surplus is maximum

When does a shortage occur

When quantity demanded exceeds the quantity supplied

When does a surplus occur

When quantity supplied exceeds the quantity demanded

Price Elasticity of Demand (PED) (definition)

PED measures the responsiveness of quantity demanded of a good due to a change in the price of the good itself, ceteris paribus

Price Elasticity of Supply (PES) (definition)

PES measures the responsiveness of quantity supplied of agood due to a change in the price of the good itself, ceteris paribus.

Income Elasticity of Demand (YED) (definition)

YED measures the responsiveness of demand for a good due to a change in consumers’ income, ceteris paribus

Cross Elasticity of Demand (XED) (definition)

XED measures the responsiveness of the demand for a good due to changes in the price of another good, ceteris paribus.

Wage Elasticity of Demand (WED) (definition)

The responsiveness of the quantity demanded for labour due to a change in wage rate, ceteris paribus

Wage Elasticity of Supply (WES)

The responsiveness of the quantity supplied of labour due to a change in wage rate, ceteris paribus

Total revenue (formula)

= Total Expenditure (TE) = Product Price x Quantity Traded

When demand changes, does PES matter, why?

PES is not required in determining the change in total revenue / expenditure as PE and QE will change in the same direction.

When supply changes, does PED matter, why?

PED is required in determining the change in total revenue / expenditure as PE and QE will always change in opposite directions

Deadweight loss (definition)

The loss of social welfare when a socially optimal level of output is not reached

Allocative efficiency (definition in terms of surplus)

When the total surplus is maximum such that no change in equilibrium output will increase the total surplus