]]Price per cup($)]] | ]]Quantity Demanded]] |
---|---|
.25 | 120 |
.50 | 100 |
.75 | 80 |
1.00 | 60 |
1.25 | 40 |
Income effect: when prices are low, people are easily able to afford it since their budget would allow it
Substitution effect: when products price increase, they tend to increase in relative to other products
Diminishing marginal utility: As more units of a product are consumed, the satisfaction/utility it provides tends to decline
Change is the quantity demanded only occurs due to change in price of a product
If product X would become expensive (1.00 to 1.25), the quantity demanded would fall (60 to 40)
Change in demand occurs when the entire demand curve shifts upwards or downwards due to specific factors
Change in demand occurs irrespective of price changes of the product
Substitutes goods are products that a consumer can use as alternates to satisfy the same essential function, yielding the same degree of happiness (utility)
2 goods would be considered substitutes if an increase in the price of one good causes an increase in demand for the other good
Assuming 2 institutes only exist in the market: Mammoth State University (MSU) and Ivy Vine College (IVC)
In an effort to generate more revenue, IVC raises fee per student which in turn leads to counter effects (see below)
Automatically, IVC faces a decline in demand while MSU faces increase in demand
Increasing Marginal Costs
]]Price per cup ($)]] | ]]Quantity supplied]] |
---|---|
.25 | 40 |
.50 | 60 |
.75 | 80 |
1.00 | 100 |
1.25 | 120 |
The cost of production (land, labor, capital) has an inverse impact on the supply
When the cost of these increases, the supplier decides to produce less of the products since he is unable to afford the production cost
Price per cup ($) | Quantity demanded | Quantity supplied | Qd-Qs | Situation | Price should |
---|---|---|---|---|---|
.25 | 120 | 40 | 80 | Shortage | rise |
.50 | 100 | 60 | 40 | shortage | rise |
{{.75{{ | {{80{{ | {{80{{ | 0 | equilibrim | Same |
1.00 | 60 | 100 | -40 | surplus | fall |
1.25 | 40 | 120 | -80 | surplus | fall |
Advancements in computer technology and production methods increases supply greatly
At equilibrium price of $4,000, there is now a surplus
To eliminate the surplus, the market price must fall to P2 and the equilibrium quantity must rise to Q2
Simultaneous changes in Demand and Supply
When both demand and supply are changing, one of the equilibrium outcomes (price or quantity) is predictable and one is unpredictable
Before combining the two shifting curves, predict changes in price and quantity for each shift, by itself
The variable that is rising in one case and falling in the other case is your ambiguous prediction
consumer surplus, the difference between the price consumers are willing to pay and the price you actually pay for a product
At a price of $5, three units of the good are purchased.
First 2 units receive consumer surplus as the price being willingly paid for exceeds $5.
The third unit pays a price exactly equal to his willingness to pay so he earns no consumer surplus.
Total consumer surplus is the total amount earned by these three consumer together
It is the difference between the price received and the marginal cost of producing the good
The first two units earn producer surplus because $5 is above the marginal cost
The third unit earns no additional producer surplus, since the marginal cost is exactly equal to the price received by supplier
Total producer surplus is the total amount earned by these three producers.
The area under the demand curve and above the market price is equal to total consumer surplus
The area above the supply curve and below the market price is equal to total producer surplus
Welfare would be maximized at equilibrium level
Use area of triangle (1/2 x base x height) to calculate producer and consumer surplus