H Economics Unit 2

Law of Demand

Tendency for price and quantity demanded to move in opposite directions; applies when there is a price change but all other influences on demand are held constant

Income effect

The change in consumption that occurs when a price causes consumers to feel a certain way

Ex. "Oh that purse is so expensive, it makes me feel poor. I will not buy it"

substitution effect

An increase in the price of a good that will cause consumers choose a cheaper alternative

Ex. "Wow, Coke prices went up so I'm going to buy Pepsi instead because it's cheaper."

Ceteris Paribus

a Latin phrase that means "all other things held constant"

demand schedule

a table that shows the quantity of a good that a consumer will buy at various possible prices

Demand Curve

a graphical summary that shows the quantity of a good that a consumer will buy at various possible prices

Why do demand curves slope downward

according to the law of demand, as the price of a good or service increases, the quantity demanded of that good falls

-people don't want to pay high prices so less people will buy it

market demand schedule

A table comparing different markets of the quantity demanded; you look at the big picture, including all individuals

Ex. The market of Chick-Fil-A in all 50 states compared

Why do we have changes in "Quantity Demanded" and what happens to the curve?

Price; There is movement along the demand curve

Why do we have changes in demand and what happens to the curve?

Because of factors other than price; the entire demand curve shifts

What are the factors that change demand (determinants)?

-Consumer taste

-Consumer income

-Complementary goods

-Related goods

-Consumer expectations

-Market size (number of buyers)

Consumer taste

Many consumers are suddenly interested in product of no longer interested in product due to

-good/bad press

-celebrity endorsements

-new hype about it

-seasonality (Halloween products in october)

Ex. It's Valentine's Day so everyone is buying roses

Consumer Income

a consumers ability to buy based on if the average income has risen/dropped

Ex. "Boeing moves into town so people can buy normal goods, not inferior"

Complementary Goods

Many consumers are interested/not interested due to the price of it's complement

Ex. Peanut butter prices go up so jelly is not being bought

Substitue Goods

Many consumers are suddenly interested in given product because its alternative's price has risen/dropped

Consumer Expectations

Consumers change their behavior based on their expectations for future prices and future economic conditions

Ex. Prices of cars will go up in two months so car sales will go up now

Market Size (number of buyers)

Many more consumers will/will not buy due to the size of the current market

Ex. Demand for hotels will be up due to a concert in Charleston

Elasticity of Demand

a measure of how consumers react to a change in price

elastic

Describes demand that IS sensitive to change in price; people care about how much they pay

Inelastic

Describes demand that IS NOT sensitive to a change in price; people do not care about how much they pay

Total Revenue

the total amount of money a firm receives by selling goods or services; Price x Quantity

Factors of inelasticity

-Time; do I have time to buy it?

Ex. I only have 2 days to buy a prom dress, so I will pay whatever I need to.

-Necessity; do I have to have it?

Ex. I'm allergic to peanuts so I need this epi-pen

-Substitutes; is there an alternative?

Ex. Nothing compares to an iPhone so I will pay anything.

-Who; who is paying for it?

Ex. My dad is paying for my dinner so I will order surf & turf

-Income; how much of how my income is it?

Ex. Gum is only $3 so I don't care about how much it costs.

Law of Supply

Increase in price of a good leads to increase in quantity supplied

quantity supplied

the amount of a good or service that a firm is willing and able to supply at a given price

supply schedule

a table that shows the relationship between the price of a product and the quantity of the product supplied

Supply Curve

A curve that shows the relationship between the price of a product and the quantity of the product supplied

-the representation on a graph of the info given by a supply schedule

market supply curve

the supply curve that shows the quantities offered at various prices by all firms that offer the product for sale in a given market

Four Conditions of Perfect Competition

1. Many buyers and sellers participate in the market

2. Sellers offer identical products

3. Educated consumers (aware of price changed by various firms)

4. Sellers are able to enter and exit the market freely

Elasticity of Supply

a measure of how responsive producers are to price changes in the marketplace

Shift in Supply Curve

movement of a supply curve left or right resulting from a change in one of the determinants of supply other than the price of the good

What determines elasticity of supply?

-How costly it is for firms to change production

Ex. t-shirts are cheaper, gold is more expensive

-Time; to expand factories, install new assembly lines to increase production, etc

pricetakers

When buyers and sellers have to accept the price set by the market

Factors that shift the supply curve?

1. input costs (materials that go into product)

2. labor productivity

3. technology

4. producer expectations

5. number of producers

6. government action

7. natural disasters

input costs

the price of the resources needed to produce a good or service

Labor Productivity

the quantity of goods and services that can be produced by one worker or by one hour of work

Technology

new production method

Government Action

Activities by the government can change the costs of production

Ex. taxes, regulations, subsidies

Producer Expectations

The amount of product producers are willing and able to supply may be influenced by whether they believe prices will go up or down

Number of Producers

when amount of product depends on amount of firms that are producing product in question; if number of firms increases, supply increased and vice versa

Natural Disasters

a natural event such as a flood, earthquake, or hurricane that causes great damage to hurt market

short run

the period of time during which at least one of a firm's inputs is fixed

long run

the time period in which all inputs can be varied (variable)

marginal product of labor

the additional output a firm produces as a result of hiring one more worker

Diminishing marginal productivity

redundancy and congestion will cause a decrease in the marginal product of a variable input as more and more of it is combined with a fixed input

law of diminishing returns

the principle that, at some point, adding more of a variable input to the same amount of a fixed input will cause the marginal product of the variable input to decline (the rate of increase slows down)

Fixed Cost

a cost that does not change, no matter how much of a good is produced

Ex. rent for machinery and manager

variable cost

a cost that rises or falls depending on how much is produced

Ex. wages

total cost

fixed costs plus variable costs

Profit-Maximizing Output level

the amount of output that gives a firm as much profit as possible; MR>MC or MR=MC

marginal revenue

the additional income from selling one more unit of a good

How can an owner figure out their businesss' total costs

By knowing fixed and variable costs

Marginal Revenue (MR)

the change in total revenue from selling one more unit of a product; price of product

marginal cost

the cost of producing one more unit of a good; difference between total cost with the current output from the previous one

profit

The financial gain made in a transaction; total revenue-total cost (TR-TC)

Equilibrium

occurs when the quantity demand and the quantity supply at a particular price are equal

Equilibrium Price

the price that balances quantity supplied and quantity demanded

Equilibrium Quantity

the quantity supplied and the quantity demanded at the equilibrium price

Excess Demand

when quantity demanded is more than quantity supplied (QD>QS); this causes a shortage

Excess Supply

when quantity supplied is more than quantity demanded (QS>QD); this causes a surplus

shortage

a situation in which consumers want more of a good or service than producers are willing to make available at a particular price

surplus

situation in which the amount of a good or service supplied by producers is greater than the amount demanded by consumers

price ceiling

a legal maximum price that may be charged for a particular good or service

floor price

The legal minimum price imposed by the government on certain goods and services

Ex. minimum wage- employer MUST pay at least this for an hour of work

sticky prices

Prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded.

black market

a market in which buying and selling take place at prices that violate government price regulations

what is a market?

a group of buyers and sellers of a particular good or service

what factor is key to price determination?

relative scarcity