micro unit 2

Law of Demand

is a fundamental principle in economics that describes the inverse relationship between the price of a good or service and the quantity of it that consumers are willing and able to buy.

Price goes up Demand goes Down

Prices goes down Demand goes Up

(Negative slope). Amount change = along the curve.

Law of Supply

Shows a positive relationship between price and the quantity supplied. (Positive slope)

Prices goes up Supply goes up

Prices goes down Supply goes down

Elasticity

Measures the responsiveness of one economic variable to a change in another. It has an inverse relationship with the slope of a line.

Demand

The different quantities that consumers are willing able to buy at different prices

What it is: The entire relationship between price and quantity, represented by the entire demand curve.

What causes it to change: Non-price determinants (like income, tastes, population, or the prices of substitutes and complements).

Graph action: It causes a shift of the entire curve (left or right).

Subsitition effect

A cause of the law of demand - The idea that people buy fewer units when the price goes up and just buy something else instead

Income effect

A cause of the law of demand-

It explains how a change in the price of a good alters a consumer's real purchasing power (real income), which in turn changes the quantity of that good they demand

Law of diminishing marginal utility

A cause of the law of demand-

states that as a consumer consumes additional units of a specific good or service within a given period of time, the additional satisfaction (marginal utility) derived from each extra unit decreases.

Tastes and preferences

A shifter of Demand

• Direct changes in consumer preferences, trends, news, or health studies.

• Effect:

  • If a good becomes more popular or a study shows positive health benefits Demand shifts RIGHT

  • If a good loses popularity or negative news comes out Demand shifts LEFT

Market Size (Number of Buyers)

A shifter of Demand

• Concept: An increase or decrease in the overall number of potential consumers in the market (e.g., population growth, immigration, opening up international trade).

• Effect:

  • More buyers enter the market Demand shifts RIGHT

  • Fewer buyers in the market Demand shifts LEFT

Related Goods' Prices

A shifter of Demand

Concept: Changes in the prices of related products:

• Substitutes (goods used in place of each other, e.g., Coke & Pepsi):

  • Price of Substitute A Increases Demand for Good B shifts RIGHT

• Complements (goods bought and used together, e.g., Hot Dogs & Hot Dog Buns):

  • Price of Complement A Increases Demand for Good B shifts LEFT

Income of Consumers

A shifter of Demand

Concept: Changes in consumer earnings shift demand depending on the type of good:

• Normal Goods (e.g., brand-new smartphones, steak):

  • Income Increases Demand shifts RIGHT.

  • Income Decreases Demand shifts LEFT.

• Inferior Goods (e.g., instant ramen, used cars):

  • Income Increases Demand shifts LEFT

  • Income Decreases Demand shifts RIGHT

Expectations of Future Prices or Income demand

A shifter of Demand

• Concept: What buyers believe will happen in the near future regarding prices or their own financial situation.

• Effect:

  • Buyers expect future prices to increase Current Demand shifts RIGHT (buy now before it gets expensive).

  • Buyers expect future prices to decrease Current Demand shifts LEFT (wait for the sale).

Property rights

Exclusivity - The owner has the sole legal right to determine who can and cannot use or access the property.

Transferability - The owner can voluntarily buy, sell, lease, mortgage, or gift the property to someone else at a mutually agreed-upon price.

Enforceability - The legal system and government institutions protect property owners against theft, coercion, involuntary seizure, or trespass.

Exhaustiveness / Clarity of Ownership - All valuable resources are privately owned, and the boundaries/ownership rights of those assets are clearly defined.

Supply (The Whole Curve)

the different quantities that producers are willing and able to sell at different prices

What it is: The entire relationship between price and quantity supplied, represented by the entire supply curve.

What causes it to change: Non-price determinants (like production costs, technology, taxes, or the number of sellers).

Graph action: It causes a shift of the entire curve (left or right).

Resource Prices

A shifter of Supply

• Concept: Costs of raw materials, labor (wages), land, or machinery used to produce the good.

• Effect:

  • Input costs decrease Production becomes more profitable Supply shifts RIGHT

  • Input costs increase Production becomes more expensive Supply shifts LEFT

Number of producers

A shifter of Supply

• Concept: An increase or decrease in the number of individual firms producing in the market.

• Effect:

  • More firms enter the industry Supply shifts RIGHT

  • Firms exit or go out of business Supply shifts LEFT

Technology

A shifter of Supply

• Innovations or improvements in production processes, machinery, or logistics that make production more efficient.

Taxes and Subsidies (Government Action)

A shifter of Supply

• Government intervention that changes the firm's cost of production.

• Effect:

  • Subsidies (financial aid given to businesses): Effectively lowers production costs Supply shifts RIGHT

  • Taxes (per-unit taxes or regulations): Increases production costs Supply shifts LEFT

Expectations of Future Prices

A shifter of Supply

• What producers expect will happen to the market price of their good in the near future.

• Effect:

  • If producers expect future prices to increase They hold back current inventory to sell later at higher prices Current Supply shifts LEFT

  • If producers expect future prices to decrease They rush to sell inventory now Current Supply shifts RIGHT

Other Goods' Prices

Shifter of Supply

• Concept: Producers can often use their resources to make alternative products (e.g., a farmer growing corn vs. soybeans).

• Effect:

  • If the price of an alternative good increase Producers switch resources to make that higher-priced good Supply of the current good shifts LEFT

Price Elasticity of Demand (PED)

Measures the responsiveness of the quantity demanded of a good to a change in its price.

If |PED| > 1, demand is elastic

If |PED| < 1, demand is inelastic

If |PED| = 1, demand is unit elastic

If |PED| = 0, demand is perfectly inelastic

Increases as price increases and decreases as price decreases

Calculating percent change

Elastic Demand

means consumers are highly responsive to price changes. A small change in price leads to a larger change in quantity demanded. Elasticity DOESN’T equal slope

Inelastic demand

means consumers are less responsive to price changes a change in prices leads to a smaller change in quantity demanded

Unit elastic

The percentage change in quantity demanded is equal to the percentage change in price

Perfectly Inelastic

means that changes in price has no effect in quantity demanded

Total Revenue Test

If price and total revenue move in opposite directions (Price goes down, Revenue goes up, or price goes up, revenue goes down), it's elastic

If price and total revenue move in the same direction (Price goes down, Revenue goes down; or price goes up, revenue goes up), it's inelastic

If total revenue doesn't change at all, it’s Unit Elastic

Price Elasticity of Supply (PES)

Measures the responsiveness of the quantity supplied of a good to a change in its price.

PES > 1 indicates elastic supply, producers are vert responsive to price changes

PES < 1 indicates inelastic supply producers aren’t very responsive to price changes

PES = 1 indicates unit elasticity proportional change in quantity supplied and price

PES = 0 perfectly inelastic

Cross-Price Elasticity (XED)

measures the responsiveness of the quantity demanded of a good to a change in the price of different goods

Positive = subsitutes

Negative = Complements

Income Elasticity (YED)

measures the responsiveness of the quantity demanded of a good to a change in income

positive = normal

negative = inferior

Quantity Demanded

What it is: The exact number of units consumers are willing to buy at one specific price point.

What causes it to change: Only a change in the product's own price. (This follows the Law of Demand: as price goes down, quantity demanded goes up).

Graph action: It causes a movement along the existing demand curve from one point to another, rather than moving the curve itself.

Quantity Supplied

What it is: The exact number of units producers are willing to sell at one specific price point.

What causes it to change: Only a change in the product's own price. (This follows the Law of Supply: as price goes up, quantity supplied goes up).

Graph action: It causes a movement along the existing supply curve from one point to another, rather than moving the curve itself.

Equalibrium

A market is at this when the price is such that quantity supplied equals the quantity demanded.

When the price is too high, there is a surplus; eventually, prices will fall back to equilibrium as sellers have too many units and need to get rid of them

When the price is too low, there is a shortage; eventually, prices will go up to equilibrium as consumers compete for scarce goods, leading to lines or empty shelves. Sellers realize they can raise prices without losing buyers, driving the market price up to equilibrium

Consumer Surplus

$$=\text{Maximum Willingness to Pay (demand line/curve)}-\text{Actual Price Paid}$$

Example: If you are willing to pay $100 for a pair of sneakers, but you find them on sale for $70, your consumer surplus from that purchase is:

$100 - $70 = $30

producer surplus

$$=\text{Actual Price Received}-\text{Minimum Acceptable Price (Marginal Cost) (Supply Curve)}$$

If a shoe company is willing to sell a pair of sneakers for at least $40 (to cover production costs), but sells them at the market price of $70, the producer surplus on that unit is:

$70 - $40 = $30

Deadweight Loss

represents wasted value or lost welfare to society—transactions that should have happened because buyers valued the good more than it cost to produce, but didn't occur because of a market inefficiency or intervention. Directly correlates to elasticity

Allocative efficiency

is a state of the economy in which production represents consumer preferences. In simple terms, it occurs when resources are allocated to produce the exact goods and services that society values most. Occurs at market equilibrium

$\text{Price } (P) = \text{Marginal Cost } (MC)$ or

$$\text{Marginal Social Benefit } (MSB) = \text{Marginal Social Cost } (MSC)$$

double shift rule

when a supply and demand graph has this either the price or quantity will be indeterminate.

price controls

government imposed limits on the prices that can be charged for goods and services in a market. Ceilings and Floors

black market

is an illegal market where goods, services, or currencies are traded outside official government regulations, taxation, or price controls.

quota

is a government-imposed limit on the maximum quantity of a good that can be imported or produced during a specific period. This acts as a quantitative restriction that alters market supply, alters prices, and generates inefficiencies.