microeconomics-3-worksheet

Demand and Supply Concepts

• Demand: The quantity of goods/services individuals, businesses, and other players in the economy wish to purchase within a certain period.

Factors Influencing Demand

• Variables that affect demand can include:

  • Price of the product (Px)

  • Price of related goods (Pg)

  • Income of consumers (Y)

  • Tastes and preferences (T)

  • Number of people in the market (N)

  • Other potential influences

Ceteris Paribus

• The dashes (or short lines) in the equation represent ceteris paribus, meaning that those variables remain constant while others change.

Demand Equation Simplification

• The demand equation can be simplified to:Qd = f(Px)(All other variables are held constant)

Representation of Demand

• Law of Demand: If the price of a product increases, the quantity demanded decreases, and vice versa, all other factors being equal.

• The law of demand can be understood through:

  • Table (Schedule)

  • Graph

  • Equation

  • Law (theory)

Significant Variables in Demand

• The variable with the most significant impact on quantity demanded is Price.

• The variable representing market income is Y.

• The variable that represents substitute and complementary goods is Pg.

  • Examples:

    • Substitute Goods: Butter and Margarine

    • Complementary Goods: Cell phones and earphones

Movement vs Shift in Demand Curves

• Movement along a demand curve is influenced by changes in price.

• Shift in demand occurs when factors other than price change, such as income or preferences.

Substitute Products Impact

• Example: Impact of an increase in Coke's price on Pepsi:

  • Price increase of Coke leads to a decrease in its quantity demanded (Q1 to Q2).

  • Results in an increase in the demand for Pepsi, shifting its demand curve rightward (D to D1).

Inferior Goods

• Rice Example: Considered an inferior good because as income increases, the quantity demanded for rice decreases.

Market Dynamics and Surplus

• If a product's price inflates, it can lead to a surplus:

  • Surplus causes market pressure to drop prices to reach equilibrium.

Consumer and Producer Surplus

• Consumer Surplus: Difference between what consumers are willing to pay and what they actually pay.

• Producer Surplus: Difference between the lowest acceptable price for producers and the price they receive.

  • Under shifts in demand, and depending on economic conditions, the consumer and producer surplus will be affected.

Government Interventions

Price Ceiling

• Definition: A price ceiling is the maximum allowable price set by the government for a product.

• Vertical Shift Impact: A price set below equilibrium can lead to shortages in the market.

• Consumer Benefit: Increased consumer surplus but reduced producer surplus.

  • Producers are disadvantaged due to loss of surplus.

Floor Price

• Definition: A floor price is the minimum allowable price set by the government.

• Protection for Farmers: Designed to stabilize agricultural income above market equilibrium.

• Consequences of a floor price:

  • Market surplus occurs, leading to reduced quantity exchanged.

  • Consumer disadvantage occurs as consumer surplus drops due to increased prices.

Fallacy of Composition

• An example illustrating individual success leading to collective failure by farmers when all decide to plant the same crop, resulting in diminished returns.