ECONS Microeconomics Book 2A (only WA1 parts!!!)

What is demand / effective demand?

quantities of a product that consumers are willing and able to buy at various prices per period of time, ceteris paribus

What does movement along demand curve indicate?

price of the product

What is the Law of Demand?

the lower the price of the good, the greater the quantity demanded, vice versa

Why is the demand curve downward sloping?

marginal utility declines as consume more units of a good, hence price willing to pay for additional units naturally fall

What is the shift of a demand curve due to? (non-price factor(s)) tipegid

change in taste and preferences

changes in income

changes in price of related goods

consumer expectations of future price and income changes

changes in government policies

changes in interest rates

changes in demographics

What is the relationship between income and demand for normal and inferior goods?

normal goods: rise in income raises purchasing power, demand increases

inferior goods: rise in income raises purchasing power

What are substitutes? How does a changes in price (fall) affect demand curve?

goods that satisfy the same wants or needs

fall in price of Good A leads to rise in quantity demanded for Good A but fall in demand for Good B, ceteris paribus — leftward shift in demand curve for Good B

What are complements? How does changes in price (fall) affect demand curve?

goods that are used jointly together to satisfy some wants

fall in price of air ticket leads to rise in demand for hotel accommodation, ceteris paribus — rightward shift in demand curve for hotel accommodation

How does change in tastes and preference (favourable) affect demand curve?

favourable change in consumers’ taste and preferences results in an crease in demand of a good — rightward shift in demand curve

How does consumers’ expectations of future price of G&S (increase) affect demand curve?

if price of a good is expected to rise in the future, consumers will increase their demand for the good in the present to avoid paying higher prices in the future, ceteris paribus — rightward shift in demand curve for the good

How does consumers’ expectations of future income (cut) affect demand curve?

if consumers expect a pay cut in the future, demand for a good will fall in the current period as they tend to be more cautious in their spending, ceteris paribus — leftward shift of demand curve for the good

How does changes in government policies (reduction in taxes) affect demand curve?

reduction in direct taxes will increase demand for normal goods and services — rightward shift of demand curve for G&S

What is supply / effective supply?

the quantities of a product that suppliers are willing and able to sell at various prices per period of time, ceteris paribus

What is the Law of Supply?

the higher the price of a good, the higher the quantity supplied, ceteris paribus

Why is the supply curve upward sloping?

higher price is needed to cover higher marginal cost of production

What are the non-price factors affecting supply of a product? ctgesnp

change in cost of factor input

change in state of technology

change in governmental policies

seller’s expectations of future price

change in number of sellers

change from natural or abnormal circumstances

change in price of related goods

How does change in cost of factor input (rise in input prices) affect supply curve?

rise in input prices will increase the unit cost of production, resulting in lower potential profit per unit, ceteris paribus — leftward shift in supply curve

How does changes in state of technology (advancement) affect supply curve?

advancement in tech results in discovery of more efficient methods to produce a good more efficiently, hence more output produced with same input, lower unit cost of production, higher potential profit per unit, ceteris paribus — rightward shift in supply curve

How does seller’s expectation of future price (fall & rise) affect supply curve?

if price expected to rise in the future, producers may decide to reduce supply in current period and release to market when price is higher to maximise profits, supply now falls, ceteris paribus — leftward shift

if price is expected to fall in the future, producers will unload supply now, supply now will rise, ceteris paribus — rightward shift

How does change in number of sellers (increase) affect supply curve?

more producers will lead to more goods and services produced at every price — rightward shif

How does changes due to abnormal or nature circumstances (adverse & favourable) affect supply curve?

adverse changes will decrease supply as production process is disrupted (supply shocks), supply falls, ceteris paribus — leftward shift

favourable changes result in increased supply, ceteris paribus — rightward shift

How does change in price of related goods affect supply curve? (competitive & joint supply) (more production of one…)

competitive supply: more production of one good means less of the other produced as resources can be switched easily from one use to another

joint supply: more production of one good means more of the other would be produced

What happens when the market price is lower than equilibrium price?

At lower price, there is a shortage as quantity demanded exceeds quantity supplied. Consumers are unable to obtain all they wanted and are willing to pay a higher price. Producers are unable or unwilling to produce enough at the current price and would be happy to accept a higher price. As price increases, quantity demanded will fall and quantity supplied rises, reducing shortage. Price of the good will continue to rise until shortage is eliminated at equilibrium price.

What happens when the market price is higher than the equilibrium price?

There is a surplus as quantity demanded is less than quantity supplied, creating a downward pressure on price. As price decreases, quantity demanded will increase and quantity supplied will fall, reducing the surplus. PRice of good will continue to fall until surplus is eliminated at equilibrium price.

What are the steps to explaining how an event affects a market?

Initial equilibrium

Shifts in supple and demand curve

Shortage or surplus

Upward or downward pressure on price

Equilibrium (new)