Exam Prep & Demand Theory Notes

Calculations: Seek quick methods over laborious ones; utilize diagrams and graphs for rapid answers.
Multiple Choice: Employ elimination strategies to narrow down options.
Numerical Answers: Provide numbers only unless units are explicitly requested by Top Hat for auto-grading (e.g., $'7'$ vs. $'7 apples'$ ).
Click-on-Target Questions: Top Hat's circular answer areas might not cover the full relevant zone. If a point in the correct area was marked wrong, consult TAs (e.g., in Quiz 2). Avoid borderline clicks.

Transition: Moving from Edgeworth Boxes (barter, $2$ people, $2$ goods) to more traditional market models with money and prices.
Edgeworth Boxes: Still relevant for midterm/final exams.

Efficient Frontier (PPF): The outer boundary of the production possibility diagram; represents maximum possible output (e.g., greatest extent of apples and oranges).
Inefficient Points: Any point inside the PPF boundary; feasible but not achieving maximum output (e.g., could produce more of both goods).
Infeasible Points: Any point outside the PPF boundary; not possible to produce given current resources.
Specialization: Production on the PPF relies on organizing labor based on comparative advantage (e.g., most efficient orange producer makes oranges first).

Context: An individual with income ( $I$ ) can purchase goods (e.g., apples $QA$ and oranges $QO$ ) at market prices ( $PA$ and $PO$ ).
Budget Constraint: Represents all combinations of goods affordable with a given income and prices: $PO imes QO + PA imes QA = I$ . The maximum amount of oranges purchased when only oranges are bought is $I/PO$ . The maximum amount of apples purchased when only apples are bought is $I/PA$ .
Indifference Curves: Show consumer preferences (utility) for different bundles of goods.
Utility Maximization: Occurs at the tangency point between the highest possible indifference curve and the budget constraint.
Ceteris Paribus: Latin for "all else being equal." Used to analyze the effect of one variable change while holding others constant (an "experimental" approach in models).
Price Changes: If the price of oranges ( $PO$ ) rises (ceteris paribus), the budget line pivots inward, leading to a lower quantity of oranges demanded ( $QO ext{ decrease}$ ).
Income Changes: If income ( $I$ ) rises (ceteris paribus):
- Normal Good: $Q_D$ rises (positive relationship).
- Inferior Good: $Q_D$ falls (negative relationship, e.g., switching from Bud Light to craft beer).

Market Demand: The aggregate (sum) of all individual demands for a product.
Demand Function: $QD = f(P, I, PS, PC, T, EP, E_I, N)$ where:
- $P$ : Price of the good (negative relationship).
- $I$ : Income (positive for normal, negative for inferior).
- $P_S$ : Price of substitute goods (positive relationship, e.g., tea price up, coffee demand up).
- $P_C$ : Price of complementary goods (negative relationship, e.g., cream price up, coffee demand down).
- $T$ : Tastes/Preferences (positive relationship, influenced by advertising).
- $E_P$ : Expectations of future price (positive relationship, e.g., future price up, current demand up).
- $E_I$ : Expectations of future income (positive relationship, e.g., future income up, current demand up).
- $N$ : Number of buyers (positive relationship).
Linear Demand Function: A simplified representation (e.g., $Q_D = 40 - P$ ) that aggregates constant determinant effects into the intercept.
Demand Curve Graph: Price ( $P$ ) is plotted on the vertical (y) axis, and Quantity Demanded ( $Q_D$ ) on the horizontal (x) axis, resulting in a downward-sloping curve.