Econ - Unit 2

Demand

Various amount of product someone will buy over a range of prices and time

microeconomics

individual behavior and decision making by individual units like people and firms

What are the variables for calculating demand?

The price of a product and the quantity available

ceteris paribus

Other variables held constant to rule out any changes.

Demand schedule

a table showing who would be willing and able to purchase over a range of possible prices

Demand Curve

Demand schedule modeled on a graph

What is the X coordinate in a demand curve?

Quantity demanded

What is the Y coordinate in a demand curve?

Price

What happens to the demand of a product as price rises?

Demand decreases

Incentive

Motivating force causing one to act

Market Demand Curve

Shows Quantities demanded by everyone who is interested in purchasing the product

If Mike were to buy 2 burritos fr $4 dollars and Patricia were to buy 1 burrito for $4 dollars, what is the market demand?

The market demand is 3 burritos at $4. (add up quantities demanded by everyone.)

Utility

satisfaction received from a product

marginal utility

additional satisfaction received from using one or more units of a product

Diminishing marginal utility

The more of a product we use, the satisfaction we get from that product decreases

Why does the demand curve slope down?

To account for diminishing marginal utility

Who is credited for coming up with marginal utility, and using food to model it?

Carl Meneger

Law of Demand

There is an inverse relationship between demand and price. (As price goes up, demand decreases)

Why does the Law of Demand occur?

Occurs as a result of separate behavior patterns overlapping.

1. Substitution effect

2. income effect

3. law of diminishing marginal utility

Substitute effect

if the price of a product goes up, consumers buy less of the product and more of the substitute.

Income effect

If price goes down, purchasing power of consumer increases, so they can purchase more

What happens to the demand curve when you drop the ceteris paribus assumption?

The ENTIRE curve shifts. Not just line movement.

What does a shift in demand curve mean?

At the same price, more people are willing to and able to purchase that good.

(True/false) Price shifts the demand curve.

False, price only causes line movements in the curve.

What are the five factors that cause demand to shift?

Taste, number of consumers, price of related goods, income, future expectations

What are two examples of a related good?

Substitutes and Complements

Substitutes

goods used in place for one another.

Complements

Two goods that can be bought and used together

normal good

a good who’s demand increases as income increases.

ex. luxury cars, jewelry

Inferior good

A good who’s demand decreases as income increases

ex. top ramen, Shasta cola, good value

What moves quantity demanded? (NOT demand)

line movements caused by price changes

Supply

Different quantities of goods sellers are willing and able to sell (produce) at different times

Law of Supply

Direct or positive relationship between price and quantity supplied

Why does the Law of Supply occur?

At higher prices, profit seeking firms have an incentive to produce more

What are the five shifters of supply?

prices/availability of resources

number of sellers

technology

government action (taxes and subsides)

expectations of future profit

subsidy

government payment to business or market which cause an increase in supply

Surplus

Quantity of supply available is greater than the quantity demanded (QS > QD)

What do producers do when there’s a surplus?

They lower prices.

Shortage

Quantity of supply available is less then the quantity demanded (QS < QD)

Free Market pushes system toward _________.

equilibrium

Price Signals

How prices convey information and help society use scarce resources efficiently.

Double Shift rule

When supply and demand both shift, either price or quantity will be indeterminate.

Price Ceiling

Maximum legal price a seller can charge for a product.

Goal of price ceiling

Make goods affordable by keeping price from reaching equilibrium

Do price ceilings help consumers?

No, they result in black markets. 😨

Price floor

Minimum legal price a seller can sell a product

Goal of price floor

Keep prices high by keeping prices from falling into equilibrium