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The different quantities of goods that consumers are willing and able to buy at different prices
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What is demand
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There's an inverse relationship between price and quantity demanded
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What is the law of demand
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-substitution effect
-income effect
-law of diminishing marginal utility
-income effect
-law of diminishing marginal utility
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What three patterns cause the law of demand
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If the price of a product goes up then consumers buy less of it and more of a substitute
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What is the substitution effect
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If the price of a product goes down then the purchasing power increases for consumers
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What is the income effect
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The more you buy of any good, the less additional satisfaction (utility) you get from each new good consumed
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What does the law of diminishing marginal utility describe?
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price (y-axis) & quantity demanded (x-axis)
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What does the demand curve show the relationship between
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At the same price, a different amount of people are willing/able to purchase the good
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What does a shift in the demand curve mean
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No
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Does a change in price shift the demand curve
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-taste & preferences
-# of consumers
-price of related goods
-Income
-Future expectations
-# of consumers
-price of related goods
-Income
-Future expectations
answer
What are the 5 determinates of demand
question
inferior goods: when incomes increase demand decreases
normal goods: when incomes increase demand increases
normal goods: when incomes increase demand increases
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what's the difference between normal goods and inferior goods
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Goes up
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What happens to the demand for complement goods if the price of a good falls
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Goes down
answer
What happens to the demand for substitute goods if the price of a substitute falls
question
The different quantities of goods that sellers are willing and able to sell at different prices
answer
What's supply
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There is a direct relationship between price and quantity supplied
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What's the law of supply
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-price/availability of inputs
-number of sellers
-technology
-government taxes & subsidies
-expectations of future profit
-number of sellers
-technology
-government taxes & subsidies
-expectations of future profit
answer
What are the 5 determinants of supply
question
1) goes down
2) goes down
2) goes down
answer
1) What happens to demand if the price is expected to drop
2) What happens to supply if future profit is expected to increase
2) What happens to supply if future profit is expected to increase
question
where supply and demand curves intersect
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Where is equilibrium price and quantity
question
QD - QS
answer
How much is the shortage at PC
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If demand and supply curves both shift simultaneously then either price or quantity will be indeterminate
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What is the double shift rule
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The difference between what you are willing to pay and what you actually pay
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what is consumer surplus (CS)
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The difference between the price the seller received and how much they were willing to sell it for
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What is producer surplus (PS)
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The producer surplus is the grey triangle; the consumer surplus is the white triangle on top of it
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Where is the producer and consumer surplus in the diagram
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If price is above equilibrium
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When would there be a surplus
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Binding price ceilings are below equilibrium; binding price floors are above equilibrium
*If they aren't binding, then they don't affect price
*If they aren't binding, then they don't affect price
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To be binding where do price ceilings and price floors have to be
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Lost CS and PS
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What is deadweight loss (DWL)
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The blue triangle is DWL
The pink line is a price floor
There is a surplus of 30 units
The pink line is a price floor
There is a surplus of 30 units
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What does the blue triangle represent?
If the price is 50, what does the pink line show?
Is there a surplus or shortage and how much?
If the price is 50, what does the pink line show?
Is there a surplus or shortage and how much?
question
Measurement of consumers' responsiveness to a change in price
It equals the %change in quantity per %change in price
It equals the %change in quantity per %change in price
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What is price elasticity of demand
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Inelastic
The elasticity coefficient is less than one
The elasticity coefficient is less than one
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Is this an inelastic or elastic demand curve, is the elasticity coefficient less than or greater than 1
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-few substitutes (electricity)
-necessities (food)
-small portion of income (candy)
-required now rather than later (medicine)
-necessities (food)
-small portion of income (candy)
-required now rather than later (medicine)
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What are characteristics of inelastic goods
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It is elastic (in fact it is perfectly elastic)
The coefficient is greater than one (it is in fact infinite)
The coefficient is greater than one (it is in fact infinite)
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Is this demand curve elastic or inelastic, is it's coefficient of elasticity greater or less than 1
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-many substitutes (tissue boxes)
-luxuries (gold)
-large portion of income (real estate)
-plenty of time to decide on purchase
-luxuries (gold)
-large portion of income (real estate)
-plenty of time to decide on purchase
answer
What are some characteristics of elastic goods
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unit elastic: 1
perfectly elastic: infinite
perfectly inelastic: 0
perfectly elastic: infinite
perfectly inelastic: 0
answer
What is the elasticity coefficient of something that is unit elastic, perfectly elastic, perfectly inelastic?
question
price times quantity
answer
What is total revenue equal to
question
It goes down (and vice versa)
answer
What happens to total revenue when price increases for something that is elastic
question
It goes up (and vice versa)
answer
What happens to total revenue when price incrases for something that is inelastic
question
Shows sensitivity of a product's quantity to a change in price of another good
It is %change in quantity of goodA per % change in price of goodB
It is %change in quantity of goodA per % change in price of goodB
answer
What is cross price elasticity of demand
question
the two products are substitutes
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What does a positive cross-price elasticity of demand show
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the two products are complements
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What does a negative cross-price elasticity of demand show
question
Shows sensitivity of a product's quantity to a change in income
It is %change in quantity of goodA per % change in income
It is %change in quantity of goodA per % change in income
answer
What is income elasticity of demand
question
It is a normal good
answer
What does a positive income elasticity of demand show
question
It is an inferior good
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What does a negative income elasticity of demand show
question
how sensitive producers are to a change in price
It is %change in quantity supplied per %change in price
It is %change in quantity supplied per %change in price
answer
What is price elasticity of supply
question
vertical
answer
What does a perfectly inelastic supply curve look like
question
A tax on imports to increase the world price
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What is a tariff
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A limit on the number of imports
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What is a quota
question
A per unit tax on producers, to make them produce less goods that the government doesn't want
answer
What is an excise tax
question
QD - QS
answer
What is the quantity imported
question
The supply decreases.
The excise tax is equal to the vertical distance between the old and new supplie curves.
The excise tax is equal to the vertical distance between the old and new supplie curves.
answer
What happens to supply with an excise tax?
How do you find how much the excise tax is based on the graph?
How do you find how much the excise tax is based on the graph?
question
$2
answer
What is the tax per unit on coffee in the graph
question
consumers
answer
If the demand is more elastic, who pays more of the excise tax, consumers or producers
question
producers
answer
If the demand is more inelastic, who pays more of the excise tax, consumers or producers
question
The consumer's money should be spent so that the marginal utility per dollar of each good equals each other
MUx/Px = MUy/Py
MUx/Px = MUy/Py
answer
What is the utility maximizing rule and its corresponding equation
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