Slope of a line
Change in Y / Change in X = ∆𝑦/∆𝑥
Demand curve
It shows a relationship between quantity and price, in a competitive market
The slope of the demand curve is always negative, because the relationship between P and Q is negative
It is curved, because quantity demanded does not change evenly, as price changes.
To some extent, demand is inelastic, and so people will demand some, even if the price goes quite high
Price elasticity: but elasticity changes at different points on the same curve; it is shown by the slope (steep = inelastic)
Shows the quantity demanded at various prices
The quantity demanded is the quantity that buyers are willing and able to purchase at a particular price
Increase in demand is a rightwards shift, decrease a leftward shift
In-Market Surplus
This says that for those who are participating in the market: those who at a given equilibrium are buying or selling, that some people in the market are benefitting more than others
Economists argue that markets which maximize utility for all participants, are the best markets
To measure overall surplus, you have to look at the surplus provided both for consumers (demanders) and producers (suppliers)
Consumer Surplus
Consumer Surplus is when those at the high end of the demand curve receive a ‘bonus’ because they would have bought at a higher price than the equilibrium
Consumer surplus = for Demand Curves (b/c you are talking about demanders = consumers
Change in quantity demanded
A change in quantity demanded occurs when there is a change in the price of the good itself ->> a movement along the demand curve
Change in demand
A change in demand occurs when there is a change in another variable other than the price of the good itself ->> a shift of the demand curve
Causes of a shift in the demand curve
• Changes in the prices of substitute and complementary goods • Changes in income (normal and inferior goods) • changes in tastes • Changes in expectations • Changes in the number of consumers
Supply curve
A supply curve shows the quantity demanded at various prices
The quantity supplied is the quantity that producers are willing and able to sell at a particular price
Increase in supply causes a rightward shift, decrease a leftward shift
Change in quantity supplied
A change in quantity supplied occurs when there is a change in the price of the good itself ->> a movement along the supply curve
Change in supply
A change in supply occurs when there is a change in another variable other than the price of the good itself ->> a shift of the supply curve
Causes of changes in supply curve
• Changes in input prices • Changes in the prices of supplementary and complementary goods or services • Changes in technology • Changes in expectations • Changes in the number of producers
Competitive market
market in which there are many buyers and sellers of the same good or service -> key feature: no individual's actions have a noticeable effects on the price (but not true for everything e.g. coca cola)
its behavior is well described by the supply and demand model
Law of demand
A higher price, other things equal, leads people to demand a smaller quantity of that good or service.
Normal goods
Demand for them increases when customer income rises
Inferior goods
Demand decreases when income rises (less desireable)
What happens when the demand curve shifts?
increase in demand leads to a higher equilibrium price and quantity
decrease in demand leads to a lower equilibirum price and quantity
What happens when the supply curve shifts?
an increase leads to a lower equilibrium price and higher equilibrium quantity
decrease leads to a higher equilibrium price and lower equilibirum quantity
Surge pricing
Settling the rate higher until everyone who wants sth at the going price can have one (e.g. Uber)
Government Intervention
price controls: 1. price ceiling (upper limit). 2. price floor (lower limit).
assumption: markets are efficient before invention
can be justigied on basis of equity and social welfare
How price ceilings cause inefficiency (apartment example)
it reduces the quantitty of apartments rented below the efficient level
it typically leads to inefficient allocation of apartment among would-be renters
it leads to wasted time and effort as people search for apartments
it leads landlords to maintain apartments in inefficiently low quality of condition
gives rise to illegal behavior
reduces the quantity of a good bought and sold below the market equilibrium quantity (missed opportunity)
wasted resources (e.g. time, effort)
Black Markets
encourage disrespect for the law in general
worsens the positions of honest people
can diminish some of the inefficiency
Price ceiling
upper limit
can benefit some people
government officials often do not understand supply and demand analysis
Price floors
generally used for agricultural products ( a way to support the income of farmers)
lower limit
can cause unwanted surplus
governments disregard warnings of don't understand supply and demand models
they benefit some influential buyers of a good
How price floors cause inneficiency
ineficient allocation of sales among sellers
waste of resources
sellers providing an inefficiently high-quality level
illegal activity can be encouraged
Quota limit
control over quality (limit!)
use of licenses
Wedge
between demand price of the quantity transacted and supply price of the quantity transacted
Quota rent
Difference between demand and supply price at the quota limit
Price signals
Transfer information in markets
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