Econ Test 2

Demand

the desire to own something and the ability to pay for it

Law of demand

when a good's price is lower the quantity of demanded is greater. When the price is higher, the quantity demanded is lower.

Quantity of demanded

the amount people are willing to buy

Substitution effect

when a consumer reacts to a rise in the price of one good by consuming less of that good and more of a substituted good

Income effect

when prices rise, and your limited budget stays the same you have to cut back purchases of some goods

• May still pay higher cost for same thing but the demand goes down

• Works the same in reverse

Demand schedule

a table that lists the quantity of a good that a person will purchase at various prices in a market

Market demand schedule

shows the quantities demanded at various prices by all consumers in the market

• Make prediction of sales at different prices

Demand curve

a graphic representation of a demand schedule

• Assumes other factors remain constant (income, quality)

• The line will always be negative (reflecting the law of demand)

• Quantities in a market demand curve are higher

Ceteris paribus

assume that nothing besides the price would change

Non-price determinants

factors that can lead to the shifting of demand up or down

Normal goods

goods that consumers demand more of when their incomes increase

Inferior goods

Goods that you would buy in smaller quantities, or not at all, if your income were to rise and you could afford something better.

• An increase in income causes demands for these goods to fall.

• Ex: generic cereals, used cars

Consumer expectations

The expectation of a higher price in the future causes immediate demand to increase (and reversed)

Demographics

the statistical characteristics of populations, such as age, race, gender, occupation, and income level

Related goods: Complements

 two goods that are bought and used together

Related goods: Substitutes

goods that are used in places of one another

Elasticity of Demand

describe the way that consumers respond to price changes. Measures how drastically buyers will cut back or increase their demand for a good when the price rises or falls, respectively.

• Demand can be inelastic in the short term because people don’t have time to react right away

Inelastic

you buy the same amount or just a little less of a good if prices rise, relatively unresponsive to price changes.

• Elasticity of demand is less than 1

Elastic

if you buy much less of a good after a small price increase, very responsive to price changes (both increasing and decreasing)

• Elasticity of demand is greater than 1

Unitary elastic

if elasticity is exactly at 1

Calculating elasticity of demand

take the percentage of change in the quantity of the good demanded and divide by the percent change in the price of the good

Calculate percent change in price

[(Original price - new price) / original price] times 100

Calculate percent change in quantity demanded

[(original quantity demanded - new quantity demanded) / original quantity demanded] times 100

Total revenue

the amount of money a company receives by selling its goods

• Determined by price of good and quantity sold

Supply

the amount of a good or service that is available

Law of supply

producers offer more of a good or service as its price increases and less as its price falls. Individuals changing their level of production and firms entering or exiting the market. The quantity supplied increases as the prices increase

Quantity supplied

describes how much of a good or service a producer is willing and able to sell at a specific price

Supply schedule

shows the relationship between price and quantity supplied for a specific good or service, or how much of a good or service a supplier will offer at various prices.

Variables

factors that can change

Market supply schedule

the relationship between prices and the total quantity supplied by all firms in a particular market.

Supply curve

a graphic representation of supply schedule. Horizontal axis measures quantity of the good supplied

• Always rises from left to right

Elasticity of supply

measures how firms will respond to changes in the price of a good or service.

• When elasticity is greater than 1, supply is sensitive (elastic)

• Less than 1, not responsive (inelastic)

• When 1, unitary elastic

Marginal product of labor

the change in output from hiring one more worker

Increasing marginal returns

specialization increases output per worker

Diminishing marginal returns

adding more workers increases total output, but at a decreasing rate

• Produce less and less output from each additional unit of labor

• Workers have limited amount of capital (sharing resources can slow process and cost more than it's worth)

Negative marginal return

workers get in each other's way and disrupt production, so overall output decreases.

Fixed cost

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

• Ex: the building, equipment, salary

Variable costs

costs that rise or fall depending on the quantity produced

• Raw materials and some labor

Total cost

fixed and variable costs added together

Marginal cost

the additional cost of producing one more unit

Marginal revenue

the additional income from selling one more good

Average cost

total cost divided by the quantity produced

Operating cost

the cost of operating the facility

Subsidy

a government payment that supports a business or market

Excise tax

a tax in the production or sale of a good

Regulation

government intervention in a market that affects the price, quantity, or quality of a good.

Equilibrium

the point of balance at which the quantity demanded equals the quantity supplied

Disequilibrium

when quantity supplied is not equal to quantity demanded in a market.

Shortage (excess demand)

when the quantity demanded in a market is more than the quantity supplied

Surplus

when quantity supplied exceeds quantity demanded and the actual price of a good is higher than the equilibrium price

Price ceiling

a government imposed maximum price that can be legally charged for a good or a service

• Set below the equilibrium price

• Set on essential goods that might become too expensive

Rent control

price ceilings placed on apartment rents, to prevent inflation during a housing crisis

Price floor

a minimum price, set by government, that must be paid for a good or service.

Minimum wage

price floor that sets a minimum price employers can pay for 1 hour of labor

Inventory

the quantity of goods that a firm has on hand

Search costs

the financial and opportunity costs that consumers pay in searching for a product or service