Micro Exam #3
What is the market mechanism?
A system of the market where the forces of demand and supply determine the price and quantity of goods and services traded.
What is equilibrium?
Equilibrium is achieved when the price at which quantities demanded and supplied are equal.
What is disequilibrium?
Whenever markets experience imbalances. The market then forces/drives prices toward the equilibrium.
What is a surplus?
A surplus exists when the price is above equilibrium. This encourages sellers to lower their prices to eliminate the surplus.
What is a shortage?
A shortage will exist at any price below equilibrium. This leads to the price of a good increasing.
Supply Increase(shift right): P(down) Q(up)
Supply Decrease(shift left): P(up) Q(down)
Demand Increase(shift right): P(up) Q(up)
Demand Decreases(shift left): P(down) Q(down)
Demand Increases & Supply Increase: P(up and down) Q(up)
Demand Increases & Supply Decreases: P(up) Q(up and down)
Demand Decreases & Supply Increases: P(down) Q(up and down)
Demand Decreases & Supply Decreases: P(up and down) Q(down)
What is elasticity?
Used to measure the responsiveness of something on something else.
What is PED?
Price Elasticity of Demand
What does PED do?
How prices affect Qd
% change P → % change Qd
Graphs: Steep or Flat
What is PES?
Price Elasticity of Supply
What does PES do?
How prices affect Qs
% change P → % change in Qs
Graphs: Steep or Flat
What is IED?
Income Elasticity of Demand
What does IED do?
How income affects Qd
% change I → % change Qd
Graphs: Big Shift or Small Shift
Example: Incomes increase 5% → Qd decreases 10% = Inferior
Characteristics of a Good: Steep vs. Flat
Steep:
Necessity
Few substitutes
Cheap
Short time frames
Steepest Demand: Insulin + Gas
Flat:
Luxury
Many Substitutes
Expensive
Long time frames
Flattest Demand: Yahts
What are the applications of Elasticity?
Pass through costs
If a firm’s costs go up, they’ll just charge higher prices
indicates how much of a good or service buyers consume when the price changes.