Untitled Flashcards Set

Supply/demand

• Supply curves up →increase in marginal costs (incremental expense of producing the next quantity of a product)

• Demand curve slopes downward → negative relationship of price and quantity

• Equilibrium: price and quantity that clears the market; marginal cost = marginal benefit)

Shortage/Surplus

• Shortage: price is low, below the equilibrium point (price wants to go higher) 

• Surplus: price is high, about the equilibrium point (price wants to go lower)

• Quantity supplied along the supply curve → moving along the curve VS. Shift of supply curve → entire curve is shifting left/right

• Simultaneous shifts: Either Price or Quantity is ambiguous; *draw graphs separately 

Price floor/Price Ceilings

• Price floor; it does matter if there is a surplus, vice versa for price ceiling, it matters if there is a shortage 

Elasticity

• Inelastic: Few substitutes, E<1. Raise the price, revenue goes up, lower the price, revenue goes down

• Elastic: More substitutes, E >1. Raise the price, revenue goes down, Lower the price, revenue rises

Total vs. Marginal Utility

• Process of finding total marginal utility with budget constraint process:

• 1. Calculate marginal utility

• 2. Marginal utility/Price

• 3. Pick the option with highest utility (if tied, pick the one with the cheapest price)

• Higher utility