Econ Exam II (lectures 5-8)

Quantity demanded

refers to a specific amount that will be demanded per unit of time at a specific price

-it refers to a specific point on the demand curve

Change in quantity demanded, caused only by a change in the price of the good itself is shown by…

a movement along a demand curve

Demand

refers to a schedule of quantities of a good that will be bought per unit of time at various prices, other things constant

-refers to the entire demand curve

A change in demand, caused by anything other than the good’s own price, is shown by

a shift in the demand curve

SHIFT FACTORS OF DEMAND

• Prices of Related Goods

• Income

• Expected Future Prices

• Population

• Preferences

Substitute

good that can be used in place of some other good and that fulfills more or less the same purpose

A rise in the price of a substitute increases the demand for a good, shifting the demand curve to the…

right

Complement

used together with the good we are interested in

A rise in the price of a complement decreases the demand for a good, shifting the demand curve to the

left

Normal Good

Income rises → Consumption rises

Inferior Good

Income rises → Consumption falls

Other examples of inferior goods:

• Potatoes, mac n cheese, bus rides, instant ramen

Current demand for cigarettes if big tax is coming in one month

Buy more now at same price!

As the population increases in an area

Number of buyers will ordinarily increase

Demand for a good will increase

Changes in Quantity Supplied

Price increase or decrease moves us along supply curve

DoS: Prices of Factors of Production

The market for milk when the price of feed grain rises → supply curve shifts left

DoS: Technological Advance

The market for computers as better microchips invented and productive technology improves → supply curve shifts right

DoS: Prices of Goods Related in Production

I) Substitutes in Production

Change in opp. cost of production

The market for wheat when the price of corn rises (for biofuel use) → supply curve shifts left

II) Complements in Production

The market for raw leather when the price of beef rises → supply curves shifts right

OTHER SHIFT FACTORS OF SUPPLY

• D) Number of Producers in Market

• E) Expectations about future prices

• Anticipation of a price increase or price decrease

may induce producers to change their behavior in

the current time period

F) Taxes (reduce supply) and Subsidies (increase

supply)

• G) Natural disasters, elements of nature, political

disruptions

• Freezes, droughts, great weather, war, hurricanes

D) The number of Firms

The market for Litchi Fruit in China - Many new Farmers have entered the market → supply curve shifts right

When just one curve shifts (and we know the direction of the shift) we can determine…

the direction that both equilibrium price and quantity will move

When both curves shift (and we know the direction of the shifts) we can determine

the direction for either price or quantity—but not both

Tariff

an exercise tax - a tax on a specific good

-when placed on an imported good is called a tariff

Quota

a quantitative restriction on the amount that one country can export to another (Quantity Control)

Market for imported product: Tariff

Result:

-higher PE

-lower QE

Market for imported product: Quota

Result:

-higher P

-lower Q

Subsidy

a payment the government makes to either the buyer or seller, usually on a per-unit basis, when a good or service is purchased or sold.

• Result: S right

• -lower PE

• -higher QE

Embargo

the partial or complete prohibition of commerce and trade with a particular country

Price Ceilings (Caps)

A price ceiling establishes a maximum price that sellers are legally permitted

to charge.

• Example: rent control

When a price ceiling keeps the price of a good below the

market equilibrium, there will be both direct and indirect effects.

• (Direct effect) A shortage: the quantity demanded will

exceed the quantity supplied. Waiting lines may

develop.

• (Indirect effects) Quality drop and changes in other

non-price factors that are favorable to sellers &

unfavorable to buyers.

• The quantity exchanged will fall and the gains from

trade will be less than if the good were allocated by

markets

Binding

keeps price from reaching equilibrium price level

• If PC > PE, not binding

• If PC < PE, is binding

Result of binding price ceiling - shortage

Price Floor

is binding only above PE

-the minimum wage (binding minimum wage leads to unemployment) sticky wages

Arguments against raising minimum wage

-generates unemployment

-costs passed on to consumers

-minimum wage workers mostly teenagers

-increases high school drop out rates

-(only 20% min. wage workers from poor families)

Arguments in favor of higher minimum wage

– $7.25 min. wage isn’t binding

($15,080 annual full time income at minimum wage

of $7.25 per hour.)

– $31,200 poverty threshold for family of four

(in 2024)

– Worker dignity