Meow econ

Individual demand

Quantities one buyer is willing and able to buy at each price over a given period, holding other factors fixed. Demand is the whole curve; quantity demanded is one point.

Law of demand

Other things equal, lower price raises quantity demanded; higher price lowers it. These are movements along an unchanged demand curve.

Ceteris paribus

Holding all other relevant factors constant to isolate the effect of one change.

Diminishing marginal benefit

Each additional unit gives less extra benefit. Buyers require lower prices to buy more, explaining downward-sloping demand. The curve may be straight or curved.

Rational rule for buyers

Buy extra units while MB > price; reject units with MB < price. At equality, the buyer is indifferent. A divisible interior optimum has MB = price.

Perfectly competitive markets

Markets in which

1) all businesses in an industry sell an identical good

2) there are many sellers and many buyers, each of whom is small relative to the size of the market.

Individual supply

Quantities one firm is willing and able to sell at each price over a given period, holding costs, technology, and other supply determinants fixed.

Law of supply

Other things equal, higher selling price raises quantity supplied by making higher-cost units worthwhile. Own-price changes move along supply; they do not shift it.

Marginal cost (MC)

Extra cost per extra unit: change in total cost / change in quantity. Competitive firms expand while price > MC; an interior optimum has P = MC. Short-run supply is rising MC above the shutdown price.

Diminishing marginal product

Adding more of one input while others stay fixed eventually gives smaller additions to output. With input prices fixed, more input is needed per extra unit, raising MC and helping explain upward-sloping supply.

Equilibrium

P* and Q* where Qd = Qs. Planned purchases and sales match, with no pressure for price to change unless demand or supply shifts. With flexible prices, surpluses push price down and shortages push it up; adjustment is not guaranteed in every real market.

Surplus (excess supply)

Qs > Qd; size = Qs - Qd. Unsold inventory encourages price cuts. Qd rises and Qs falls along existing curves as price moves toward equilibrium.

Shortage (excess demand)

Qd > Qs; size = Qd - Qs. Competition for limited goods encourages price increases. Qd falls and Qs rises along existing curves as price moves toward equilibrium.

Cost-benefit principle

Choose an action when its extra benefit exceeds its extra opportunity cost, including time and nonmonetary effects. Compare benefits and costs in the same units.

Opportunity cost principle

A choice costs the value of the next-best alternative forgone. Include relevant money, time, and benefits sacrificed without double-counting. Benefits of the chosen activity are received, not forgone.

Marginal principle

Decide how much by comparing the benefit and cost of one more unit. Increase while MB > MC; stop before MC > MB. A divisible interior optimum has MB = MC.

Interdependence principle

Choices depend on other activities, other people's decisions, related markets, and future conditions. Example: higher train fares can increase bus demand.

Willingness to pay

The maximum a buyer would pay for a unit, reflecting its benefit to them. It can exceed the actual price; willingness to pay for the next unit equals marginal benefit.

Economic surplus

Total benefit minus total opportunity cost. For buyers: sum of purchased units' benefits minus spending. A lower price adds surplus through savings on existing purchases and gains from additional units bought.

Sunk costs

Past costs that cannot be recovered under any current choice. Ignore them when deciding now because they do not differ between alternatives.

Production possibility frontier (PPF)

Maximum feasible combinations of two goods with existing resources and technology. On = efficient; inside = feasible but inefficient; outside = unattainable. Absolute slope = opportunity cost of the horizontal good. More resources or better technology can shift it outward.

Marginal benefit (MB)

Extra benefit per extra unit: change in total benefit / change in quantity. Demand's height measures marginal willingness to pay, not total benefit.

Market demand and supply

Add individual quantities at each common price (horizontal summation). For N identical buyers, market demand = N times individual demand; convert units if needed. Apply the same method to sellers.

Movement along a curve versus a shift

Own-price change = movement along the existing curve (quantity demanded/supplied changes). A non-price determinant changes quantity at each given price = curve shift. Right means more at each price; left means less.

Demand shifter: income

Income rises: normal-good demand rises as buyers choose more; inferior-good demand falls as buyers switch to preferred alternatives. Income falls: reverse both. Hold prices fixed. Inferior describes an income relationship, not poor quality.

Demand shifter: substitutes in consumption

Goods used instead of each other. Other good's price rises: buyers switch toward this good, shifting its demand right. Other price falls: demand shifts left. Example: dearer tea increases coffee demand.

Demand shifter: complements in consumption

Goods used together. Other good's price rises: the bundle becomes dearer, so demand for this good shifts left. Other price falls: demand shifts right. Example: cheaper printers increase ink demand.

Demand shifter: preferences

Greater liking or perceived benefit raises willingness to pay and demand at each price (right); reduced liking shifts demand left. Trends, advertising, and health information can change preferences.

Demand shifter: expectations

Expected future price rises or shortages can bring purchases forward, raising current demand for storable goods; expected price falls can delay purchases. Expected higher income can raise current normal-good demand. Specify the expectation and mechanism.

Demand shifter: network effects

More users make the good more valuable to each user, raising individual willingness to pay and demand. Example: a messaging app becomes more useful when more friends join.

Demand shifter: congestion effects

More users crowd limited capacity, reducing individual benefit and demand. Example: crowded transit becomes less attractive. This differs from the direct increase in market demand when new buyers enter.

Demand shifter: number of buyers

More buyers add purchases at each price, shifting market demand right; fewer shift it left. Existing individual curves need not change. Other demand shifters usually affect individuals and then aggregate to market demand.

Supply shifter: input prices

Higher wages, energy, or material prices raise MC, making fewer units worthwhile at the same selling price: supply shifts left. Lower input prices reduce MC and shift supply right.

Supply shifter: productivity and technology

Higher productivity gives more output from the same inputs, lowering production costs per unit and increasing supply (right). Lower productivity increases costs and reduces supply (left), holding input prices fixed.

Supply shifter: substitutes in production

Goods competing for the same resources. Other good's selling price rises: firms divert resources toward it, reducing this good's supply (left). Other price falls: reverse. Example: dearer corn draws land away from wheat.

Supply shifter: complements in production

Goods produced jointly. Other good's price rises: greater joint production increases this good's supply (right). Other price falls: reverse. Example: more beef production also generates more hides.

Supply shifter: expectations

For storable goods, expected higher future prices can encourage sellers to withhold inventory, reducing current supply. Expected lower future prices encourage sales now, increasing current supply. Current production need not change in the same direction.

Supply shifter: number of sellers

More sellers add output at each price, shifting market supply right; fewer sellers shift it left. Existing firms' individual supply curves need not change.

Supply shifter: taxes, subsidies, and natural conditions

Per-unit taxes raise effective MC (supply left); per-unit subsidies lower it (right). Good growing conditions can raise supply; drought or disruptions can reduce it. Hold selling price fixed and explain the cost or capacity change.

Decreases (left). Buyers switch toward preferred alternatives as they become better off.

Income rises. What happens to demand for an inferior good?

Increases (right). Buyers switch toward the inferior good as income falls.

Income falls. What happens to demand for an inferior good?

Increases (right). Buyers choose more of it as they become better off.

Income rises. What happens to demand for a normal good?

Decreases (left). Buyers choose less of it with lower income.

Income falls. What happens to demand for a normal good?

Increases (right). Buyers switch from tea toward coffee.

The price of tea rises. If tea and coffee are substitutes, what happens to demand for coffee?

Decreases (left). Buyers switch toward cheaper tea.

The price of tea falls. If tea and coffee are substitutes, what happens to demand for coffee?

Decreases (left). Fewer printers bought means less demand for ink.

Printer prices rise. If printers and ink are complements, what happens to demand for ink?

Increases (right). More printers bought means more demand for ink.

Printer prices fall. If printers and ink are complements, what happens to demand for ink?

Increases (right). Buyers want more at each price.

A good becomes more popular. What happens to its demand?

Decreases (left). Buyers want less at each price.

A good becomes less popular. What happens to its demand?

Tends to increase (right). Buyers bring purchases forward.

Buyers expect a storable good to become more expensive later. What happens to current demand?

Tends to decrease (left). Buyers delay purchases.

Buyers expect a storable good to become cheaper later. What happens to current demand?

Tends to increase (right). Expected greater purchasing power encourages spending now.

Buyers expect higher future income and can adjust spending now. What happens to current demand for a normal good?

Tends to decrease (left). Buyers reduce spending in anticipation of lower income.

Buyers expect lower future income and adjust spending now. What happens to current demand for a normal good?

Increases (right). More people to contact makes the app more valuable.

More friends join a messaging app. With network effects, what happens to your demand for it?

Decreases (left). Fewer people to contact makes the app less valuable.

Friends leave a messaging app. With network effects, what happens to your demand for it?

Decreases (left). Crowding reduces comfort or increases waiting.

Transit becomes more crowded. Through congestion effects alone, what happens to an existing rider's demand?

Increases (right). Less crowding makes the service more attractive.

Transit becomes less crowded. Through congestion effects alone, what happens to an existing rider's demand?

Increases (right). Their purchases add to market demand; existing buyers' curves need not change.

More buyers enter a market. What happens to market demand?

Decreases (left). Their purchases disappear from market demand.

Buyers leave a market. What happens to market demand?

Decreases (left). Higher production costs make fewer units worthwhile at the same selling price.

Input prices rise. What happens to supply of the finished good?

Increases (right). Lower production costs make more units worthwhile at the same selling price.

Input prices fall. What happens to supply of the finished good?

Increases (right). Fewer inputs are needed per unit, lowering production costs.

Productivity rises. What happens to supply?

Decreases (left). More inputs are needed per unit, raising production costs.

Productivity falls. What happens to supply?

Decreases (left). Farmers shift land toward more profitable corn; these are substitutes in production.

Corn prices rise. If corn and wheat compete for farmland, what happens to wheat supply?

Increases (right). Farmers shift land away from corn toward wheat.

Corn prices fall. If corn and wheat compete for farmland, what happens to wheat supply?

Increases (right). More beef production generates more hides; these are complements in production.

Beef prices rise. If beef and hides are jointly produced, what happens to hide supply?

Decreases (left). Less beef production generates fewer hides.

Beef prices fall. If beef and hides are jointly produced, what happens to hide supply?

Decreases (left). Sellers hold inventory back to sell later.

Sellers expect a higher future price for a storable good. What happens to current supply through inventory decisions?

Increases (right). Sellers release inventory now before prices fall.

Sellers expect a lower future price for a storable good. What happens to current supply through inventory decisions?

Increases (right). New sellers add output at each price.

More sellers enter a market. What happens to market supply?

Decreases (left). Exiting sellers remove output at each price.

Sellers leave a market. What happens to market supply?

Decreases (left). The tax raises effective marginal cost.

A per-unit production tax increases. What happens to supply?

Increases (right). The subsidy lowers effective marginal cost.

A per-unit production subsidy increases. What happens to supply?

Increases (right). Better productivity raises output and lowers cost per unit.

Good weather raises crop yields with the same inputs. What happens to crop supply?

Decreases (left). Lower productivity reduces output and raises cost per unit.

A drought reduces crop yields. What happens to crop supply?

No. Quantity demanded decreases along the existing demand curve, holding other factors fixed.

The good's own price rises. Does demand shift?

No. Quantity demanded increases along the existing demand curve, holding other factors fixed.

The good's own price falls. Does demand shift?

No. Quantity supplied increases along the existing supply curve, holding other factors fixed.

The good's own selling price rises. Does supply shift?

No. Quantity supplied decreases along the existing supply curve, holding other factors fixed.

The good's own selling price falls. Does supply shift?

price-taker

Someone who decides to charge the prevailing price and whose actions do not affect the prevailing price.