Econ Unit #2

Income effect

The change in the quantity demanded of a good that results from a change in the consumer's purchasing power caused by a change in the good's price

Substitution effect

the change in the quantity demanded of a good that occurs when the price of the good changes relative to the price of other goods, leading consumers to substitute one for another

Diminishing marginal utility

is the principle that as a consumer consumes more units of a good or service, the additional satisfaction (Marginal utility) gained from each additional unit decreases, even though total satisfaction (total utility) continues to rise

Utility

Satisfaction or pleasure gained from consuming a good or service

Total Utility

The cumulative satisfaction from all units consumed

Marginal Utility

The extra satisfaction from consuming one more unit

Price Ceiling

Maximum price, must be low (below equilibrium), Meant to help consumers, Problem: leads to shortage, Possible examples: health care, gasoline, rent control

Price Floor

Minimum price, Must be high (above equilibrium), Meant to help suppliers (such as workers), Problem: leads to  surplus, Examples: minimum wage, agricultural price supports

Determinants of Demand - Consumer Income

For normal goods, an increase in income causes an increase in demand. For inferior goods, an increase in income causes a decrease in demand. AKA, a change in income that causes a change in demand.

Determinants of Demand - Consumer Tastes

When consumers in general desire a product more (or less) (due to factors other than money), demand increases or decreases. Consumer tastes change due to trends, Changes in product quality, and seasons.

Determinants of Demand - Price of a Substitute

When a substitute (margarine) becomes more or less expensive, it increases or decreases demand for the original product (butter)

Determinants of Demand - Price of a Complement

When a complement (gasoline) becomes more or less expensive, it decreases or increases demand for the original product (automobiles)

Determinants of Demand - Number of Buyers

When there are more or less potential consumers, demand for a product increases or decreases

Determinants of Demand - Future Prices Expected by Consumers

When consumers expect higher or lower prices in the future, the demand for the product now increases or decreases

Normal Good

Demand goes up as income goes up, and goes down as income goes down. Ex: Clothing, restaurant meals, fresh produce, and standard household appliances.

Inferior Good

Demand goes down as income goes up (because people can afford to trade up for a better alternative) and goes up when income falls. Ex: Ramen, public transportation

Substitute

a product that may be used in place of another

Complement

a product which increases use of another

Determinants of Supply - Production Costs

Any increase or decrease in the cost of land, labor, or capital causes the supply of the product to decrease or increase

Determinants of Supply - Productivity/Technology

When workers’ productivity increases or decreases, supply increases or decreases

Determinants of Supply - Number of Sellers

When the number of sellers in a market increases or decreases, supply increases or decreases

Determinants of Supply - Producer Expectations

When producers expect higher or lower prices in the future, the supply for the product now decreases or increases

Determinants of Supply - Price of Other Goods

If producers of a good are faced with the higher or lower prices of a good they could produce alternatively, supply for the good in question decreases or increases

Elasticity

Responsiveness, How much one thing will change due to a change in another thing, Elastic = changes significantly, Inelastic = changes very little

Price elasticity of demand

How much quantity demanded changes due to a change in price

Price elasticity of supply

How much quantity supplied changes due to a change in price

Cross elasticity of demand

How much demand changes due to a change in the price of a substitute or complement

Income elasticity of demand

How much demand changes due to a change in income

Total Revenue Equation

TR=Price x Quantity (P x Q)

Math Elasticity of Demand and Supply Equation

Elasticity Coefficients for supply and Demand

• Elastic: Ed(s) >1

• Inelastic : Ed(s)<1

• Unit elastic : Ed(s)=1

Price elasticity of supply

How much quantity supplied changes due to a change in price

Elastic Supply

Resources can easily be shifted between alternative uses. It is relatively easy to supply more when price increases. Example: Hamburgers

Inelastic Supply

Resources cannot easily be shifted between alternative uses. It is relatively difficult to supply more when price increases. Example: Parking spaces in downtown Denver

Cross Elasticity Equation

• If Exy is zero (or very close to it), the products are UNRELATED.

• If Exy is positive, product Y is a SUBSTITUTE for X

• If Exy is negative, product Y is a COMPLEMENT for X.

Income Elasticity Equation

• If Ei is positive, the good in question is a normal good

• If Ei is negative, the good in question is an inferior good

Equation for Consumer and Producer Surplus

½ base x height

Land

The natural elements not created by human effort (Natural Resources)

Capital

Includes manufactured goods, tools, equipment, and structures used to produce other goods and services (Man-Made Resources)

Opportunity cost

the value of the single next-best alternative given up when making a choice