EC101 Microeconomics Midterm #1 (Watson)

1) What gets produced?
- Central Planning
--> System did not work, bureaucrats decided to plan out every facet of the economy
- US and developed countries use:
--> Market System (What gets produced is decided by the market)

2) How does it get produced?
- Questions: Do we use more machinery? etc.
--> Centrally Planned: Decided by a committee
--> Market Economy: Decided by firms

3) Who gets what is produced?
- Ideally in a market system, it is designed with a reward system of whoever is the most successful
- Big companies have a great deal of responsibility, and if they make good decisions their compensation should reflect their level of productivity
--> Ex: Mark Zuckerberg: his compensation reflects the degree of productivity with advertisers

Self-Interest
Selfishness is okay, it is inevitable

SELF-INTEREST is CHECKED by COMPETITION
--> Threat of Competition is CHECKED by self-interest

Competition can get out of control, within a framework of law
- A legal system is in place to ensure competition does not get out of control

Self-interest is competition working in a framework of law

1) People are RATIONAL
--> People know what they want, these rankings can change over time but they are consistent

2) People respond to incentives
--> Ex: Cigarettes, the federal government put a huge tax on cigarettes, this made them more expensive and therefore incentivized people to stop buying them

3) Every decision involved an opportunity cost
--> Facebook, how much does it cost? YOUR TIME, it is not a monetary cost but an OPPORTUNITY cost

4) Best decisions are made by thinking "at the margin"

- Households = The most basic unit of economy

- Firms = Interact with one another

Firms are suppliers and household are demanders, goods flow from firms --> Households

Households are suppliers and firms are demanders

Labor and Capital

1. Price
2. Preferences
3. Expectations
4. Income
5. Number of Buyers

When your income goes up, what do you do? Sometimes you buy more or you may cut back to buy something of a higher quality

Substitutes: Goods which can be consumed instead of one another, your preference is determined by price and demand goes up when price goes up and vice versa

Complements: Goods that tend to be consumed together --> When the demand goes down, the price of the complement goes up and vice versa

A table that shows the relationship between the price of a good and the quantity demanded --> Holding all non-price determinants constant, i.e. income, price of related goods, tastes, expectations

Always price-related

Y = P

Quantity-related

X = Q

The quantity demanded in the market is the sum of quantities demanded by all buyers at each price

Qd = Quantity Demanded
--> Add up quantity that each person will consume at a specific price

Individual: Price (P) on Y and quantity (q) on X

Market: Price (P) on X and quantity (Q)

The demand curve SHIFTS

Two Types of Changes in Demand/Supply:

1. MOVEMENT along curve, due to a change in PRICE

2. SHIFT in curve due to FACTORS OTHER THAN the price

They sell more when the price goes up
--> Supply curves from low to high

Says they sell less when the price goes up

Q1/Q2: on Y
P1/P2: on X

Then the curve will SHIFT

INCREASE in supply

S1 --> S2

Shifts RIGHT because it is an INCREASE

Price change

ANY other factor (than price) change

1. Technology
2. Input Costs
3. Number of Sellers
4. Expectations of Buyers (Mainly about predictions of future price)

SELL MORE TODAY, sell as many as you can today because in the future you may not be able to make as much of a profit

The price of the good goes up when the coupon is taken away
--> You move ALONG the demand curve, coupons just affect price, not one of the shifters of demand

1. Demand will INCREASE (Taste and Preferences, Market Size)

2. Quantity Supply goes UP

Demand Curve has shifted but the graph will only show a supply curve
--> Shifts to Right

The point where supply and demand cross over one another

Surplus

Price too high --> Move it down (It would be too costly for them to keep producing this much without selling them)

Shortage

Incentive to increase supply and sell more --> The price goes UP

Decrease in the demand for one good because the price of a substitute went down so people would go purchase the other good instead

EQUILIBRIUM PRICE and QUANTITY go DOWN

BECAUSE the input cost for supply goes DOWN
Price goes down, quantity goes up

You have a market and an equilibrium

Is a cap on the highest price you're allowed to make the good

Scenario: The Government puts a cap on the price to keep it lower

EX: If rent is 1000 and they say that the rent should be 1200 @ the highest

EX: If rent is 1000 and they say that 600 should be the highest

Scenario: Government wants to keep the price high, for example in the tobacco market

Is a standard price that you're not allowed to sell for lower

Price Floor = You can't sell tobacco for lower than this price

NORMAL = income goes up, buy more of good
- income goes down, buy less of good

INFERIOR = income goes up, buy less of good
- income goes down, buy more of good

When the price of a complement goes up, demand goes down down (Demand curve shifts LEFT)

When the price goes up, demand goes up (Demand curve shifts RIGHT)

Lower case "q"

Upper case "Q"

creates a MOVEMENT ALONG the curve

Quantity Demanded = Point on demand curve

Only determinant which is changing here is the PRICE

WHOLE curve SHIFTS
--> Higher quantity demanded @ every price = RIGHTWARD shift

One of the NON-price determinants have changed

What could have caused this increase in demand?
Ex: Taste and Preference, new research says a food is healthier

Ex: Price of a complement goes down, higher demand

Ex: Income increase

Creates a movement UP ALONG the demand curve

SHIFT in ENTIRE CURVE, the entire curve shifts to the LEFT

What could have caused this?
Ex: Price of substitute goes down, price of complement goes up

Ex: If price by itself goes down, quantity demanded goes up

Price (Y-axis)

If you expect some change in the market, you change your behavior now even though nothing has changed yet (market responds to expectations heavily)

1. Price
2. Input Prices
- Labor is the MOST COSTLY, when these costs change it effects what the store is willing to supply
3. Technology
- More machinery = less people = less costly
- Capital = Machines
- NOT input cost
4. Expectations
- May increase supply to get more customers

A table that shows the relationship between the price of a good and the quantity supplied

Ex: How many lattes Starbucks would be willing to supply at the following prices, given current expectations, etc.

S.S. shows that for every quantity the producer is willing to supply
--> ignoring demand aspect

You are going to make a HIGHER revenue when you make it @ a HIGHER price, when you produce more COSTS INCREASE

Market can be defined any way we want
Ex: All the Starbucks on BU's campus or all the Starbucks in Boston

Quantity Supplied in the Market = Sum of the quantities supplied by all sellers at each price

When we move from an individual supply to a market supply, we have to add the number of sellers to the determinants

1. Price
2. Input Prices
3. Technology
4. Expectations
5. NUMBER OF SELLERS

Input Prices, technology, expectations, and the numbers of sellers all held constant
--> Increase in Quantity Supplied = RIGHTWARD shift

ONLY determinant of supply that has changed = PRICE
--> Called an increase in quantity supplied

Input costs increase --> quantity decreases (supply curve shifts to the LEFT)

Increase in supply --> ENTIRE CURVE shifts to the right
(technology could've improved, number of producers increased)

We have to SHIFT the WHOLE CURVE and there will be a different quantity @ each price

MOVE from ONE POINT to the OTHER on the SAME line, point moves DOWN

ENTIRE CURVE shifts LEFT, lower quantity supplied at a LOWER price

E = (Q, P)

Quantity Demanded = Quantity Supplied

Result: Excess supply, or a surplus

To try to get things sold, they lower the price and the quantity demanded increases as a result of that --> continues until we get back to equilibrium

Downward pressure on price, price declines towards P*

As P falls, Qd increases toward Q, and Qs towards Q

Process stops when equilibrium is reached and the surplus is eliminated

Legally mandated MINIMUM price set by the GOVERNMENT

Binding BECAUSE it is set above P* -- which gets the price too high, and results in a surplus

BELOW EQUILIBRIUM price

Non-binding BECAUSE it has been set at a price lower than P*

To be BINDING: it HAS TO be set above the price floor

First enacted: 1933 (25 cents per hour)
Declared unconstitutional: 1935

Reestablished: 1938 (again at 25 cents per hour)

NO, for most places it is not

It can be higher

At Pl, Qd > Qs, which results in an excess demand or shortage

Over time, there is not enough supply --> producers start to raise prices --> quantity of demand goes down, quantity of supply goes up

AS A RESULT of natural forces (with no other factors) MAKE the price

UPWARD pressure on the price and the price increases toward P*

As P increases, Qd decreases toward Q, and Qs increases toward Q

Process stops when minimum wage is reached and the shortage is eliminated

Gets the price TOO LOW and results in a shortage

Ex: Rent control, wage and price controls

Qd > Qs, who gets the available quantity?

BINDING because when it is set below P* -- which gets the price too low, and results in a shortage

Pnb is a non-binding price ceiling, because it has been set at a higher price than P*

NO

Equilibrium Qd = Qs
(In market)

E = (Q,P)

- Start at equilibrium

- Change the value of one of the non-price determinants of supply or demand

- Compare the new equilibrium with the old one

-Helps us understand why the market behaves the way it does

1. WHICH curve shifts
--> Demand or Supply?

2. WHICH WAY does it shift?
--> Rightward Shift = At every price, there will be a higher quantity demanded

--> Leftward Shift = At every price there will be a lower quantity demanded

3. What happens to the EQUILIBRIUM P and Q after the shift?
--> INCREASE in demand leads to an INCREASE in equilibrium and in equilibrium quantity
--> Also leads to an INCREASE in quantity supplied

--> DECREASE in demand leads to an DECREASE in equilibrium and in equilibrium quantity
--> Also leads to a DECREASE in quantity supplied

They BOTH go UP or DOWN together

- NO CHANGE in DEMAND

- LEFTWARD SHIFT: smaller quantity supplied @ every price
--> RIGHTWARD SHIFT: larger quantity supplied @ every price

- P and Q don't have to move in the same direction (one can go up and one can go down)
--> ie. Equilibrium Price went DOWN, quantity demanded went UP

...if the market is left alone

If the government gets involved they can put in a binding price ceiling

Demand INCREASES

INCREASE in demand leads to an increase in equilibrium price and an increase in equilibrium quantity
NOTE: Increase in demand leads to an increase in quantity supplied

1. Which curve shifts?
--> Demand, education programs change tastes

2. Which way does it shift?
--> To the left - tastes change away from the drug

3. What happens to equilibrium P and Q after the shift?
--> The decrease in demand leads to a decrease in equilibrium price and a decrease in the equilibrium quantity
NOTE: Decrease in demand leads to a decrease in quantity supplied

in the SAME direction

1. Which curve shifts?
--> Supply, there are fewer producers

2. Which way does it shift?
--> To the left, quantity supplied is LESS at EVERY price

3. What happens to the equilibrium price and quantity?
--> Supply DECREASES, leading to an INCREASE in equilibrium price and a DECREASE in equilibrium quantity
Note: Decrease in supply led to a decrease in quantity demanded

Equilibrium price DECREASES

Equilibrium quantity INCREASES

Note: Increase in supply lead to an increase in quantity demanded

Equilibrium price and quantity change in OPPOSITE DIRECTIONS

Price of DVD players go down by an average of 100 a player
--> Quantity of DVD players sold went up by 1 million units

Price of Gasoline goes down by an average of 40 cents per gallon
--> Quantity of gasoline sold goes up by 200,000 gallons

YOU CAN"T TELL FROM THIS INFO, because there is no common denominator, we don't know which price these quantities started from
--> depends how much the item is to figure out the discount

What do you NEED to compare these 2 markets?
--> Express changes in percentages, percentage change in price and percentage change in quantity

Measure of how sensitive quantity demanded is to changes in price

Percentage change in quantity demanded divided by the percentage change in price

% Delta Quantity Demanded/% Delta Price

We can't see right off the bat what the elasticity is, but the SLOPE of the curve will indicate its elasticity

INELASTIC

Quantity Demanded: NOT sensitive to price changes
The STEEPER the slope, the more INELASTIC

ELASTIC

Quantity Demanded: Much more sensitive to changes in price

The FLATTER the slope/curve, the more ELASTIC

Change in Price along the INELASTIC CURVE
--> Quantity DOESN'T CHANGE very MUCH

Change in Price along the ELASTIC curve
--> Quantity changes DRAMATICALLY

Steeper

Flatter

Even with a price change, there is ABSOLUTELY NO CHANGE in QUANTITY DEMANDED

Ex: A good that would have a VDC is medicine that someone needs to live, insulin for a diabetic
--> Regardless of price YOU HAVE TO HAVE IT

If the price goes above a certain level, the quantity will go down to ABSOLUTELY ZERO

@ or below the upper bound price, the quantity can change

Price E of D = % Delta Qd/% Delta P

In general: (NEW - OLD) / OLD
PRICE percentage change: (NEW PRICE - OLD PRICE) / OLD PRICE

***With this formula, the distance between A to B and B to A WILL NOT ALWAYS BE THE SAME, in order to get the elasticity from the same segment over the same curve, you need to use the midpoint formula

NEGATIVE

Instead of starting from one point to the other, you start in the middle

This formula allows us to get the elasticity from the same segment over the same curve

ALMOST ALWAYS use the MIDPOINT FORMULA instead of the Price Elasticity of demand formula

NOTE: if you get one of the percentage changes, you STILL have to use the midpoint formula, have to calculate the change in quantity even though you don't have to calculate the change in price

(Qd NEW - Qd OLD) / (Qd NEW + Qd OLD)/(2)

GREATER (>) than 1 : Demand is ELASTIC

LESS (<) than 1 : Demand is INELASTIC

EQUAL (=) to 1 : UNIT ELASTIC

EQUAL (=) to 2 : Means that for every 1% change in price, quantity demanded will change by 2%
--> If you lower your price by 10%, only see a 5% increase in quantity demanded

NOT constant

Slope DOESN'T CHANGE because it is along a linear curve

Elasticity IS NOT the same as slope, even though slope indicates elasticity

ELASTIC curve above and an INELASTIC curve below

a STEEPER curve will have a longer INELASTIC part

a FLATTER curve will have a longer ELASTIC part

For instance, the top may be -3, being more ELASTIC, and the bottom might be -.538 INELASTIC

UNIT elastic can be in the MIDDLE of these two points because it = 1

INELASTIC CURVE - more VERTICAL
--> Elastic part, Unit Elastic part, Inelastic part

ELASTIC CURVE - more HORIZONTAL
--> Elastic part, Unit Elastic part, Inelastic part

SENSITIVITY

For every 1% change in price, 2% change in quantity demanded

For every 1% change in price, 1% change in quantity demanded

1. Availability of Close Substitutes
--> Demand for good with close substitutes is more elastic

2. Passage of Time
--> The longer the period of time, the more elastic is the demand

3. Luxuries vs. Necessities
--> Demand for luxuries is more elastic than the demand for necessities

4. Definition of the Market
--> The broader definition of the good, the less elastic the demand

5. Share of a Good in a Consumer's Buget
--> Which is more elastic?
- The demand for chewing gum or the demand for SUV's
- DEMAND FOR SUV's is more ELASTIC
- Demand for a good will be more elastic the average share in a consumer's budget

- You have more options and it is more elastic if you have more time to make decisions
--> Price change produce a large change in quantity demanded
--> Consumers adjust to the new price

A SHORTER period will be MORE ELASTIC because you dont have as much time to make decisions

Measures the response of demand for one good to changes in the price of another good

Ex: If two goods are substitutes, the demand for Pepsi would go UP if the Coke prices went UP

(GREATER THAN) > 0

Ex: An increase in price of beef causes an increase in demand for chicken

(LESS THAN) < 0

Ex: An increase in price of computers causes decrease in demand for software

(% Delta in Qd for good 1) / (% Delta Price for good 2)

ZERO (0)

(% Change in Qd of Coke) / (% Change in price of Pepsi)

(3%) / (1%) = 3

(% Delta Qd for Laser Cartridges) / (% Change in price of Laser Printers)

-10% / 5% = -2

Then the Cross-Price Elasticity of Demand Will Be: POSITIVE

Ex: Two brands of digital music players

Then the Cross-Price Elasticity of Demand Will Be: NEGATIVE

Ex: Digital music players and song downloads from online music stores

Then the Cross-Price Elasticity of Demand Will Be: ZERO

Ex: Digital music players and peanut butter

Measures the response of Qd to a change in consumer income

Percent change in Qd / Percent Change in Income

An INCREASE in income causes an increase in demand for a normal good

GREATER THAN (>) 0

LESS THAN (<) 0

Income Elasticity of Demand = % Change in Qd of Blu-ray players / % Change in Income

30%/15% = 2

So, a 1% increase in consumers' incomes will lead to a 2% increase in the quantity demanded of Blu-ray players

Measures the response of the quantity supplied a good to changes in the good's price

Price Elasticity of Supply = % Change in quantity supplied / % Change in price

Measures the ability and willingness of producers to alter the quantity they produce of a good in response to a change in the good's price

Price elasticity of supply is TYPICALLY HIGHER the longer the period of time involved

If it is ELASTIC = positive
If it is INELASTIC = negative

1. Budget

2. Tastes and Preferences

DOWNWARD sloping: As the price goes up, you wouldn't buy as much of it, this is the demand line

Happiness, satisfaction, or well-being

Tastes and Preferences
--> Trying to satisfy as many tastes and preferences given your budget

To what EXTENT are you consuming stuff that makes you happy

Marginal Utility Formula: Marginal Utility of X = MUx = (Change U) /(Change X)

@ a certain point the more you consume after a certain point makes your Marginal Utility DECLINE

When I DON'T HAVE TOO MUCH of a good, my Marginal Utility is HIGH

When I have TOO MUCH of a good, my Marginal Utility is LOW

YOU CAN have a NEGATIVE MARGINAL UTILITY

The same total happiness is on the line (same # of Utils)

If it was a different number of utils it would be on a different line

1. The HIGHER the indifference curves, the HIGHER the utility that it represents
--> Graphically illustrates more = better

2. Indifference Curves NEVER Cross
--> Can't intersect, can't run into each other, it leads to a contradiction or conflict

3. They USUALLY slope down
--> Usually have a negative slope

What would it mean if an indifference curve sloped up?
- To keep at the same utility level, in order to keep giving you more of one good, you have to take some of the other good away
- The only way it can be upward sloping is if one of the "GOODS" is a "BAD"

4. Indifference Curves are USUALLY CONVEX - bowed inward towards the origin
--> "Concave up"

(MRSy,x)

Measures the amount of one good on the Y-AXIS that you are WILLING TO GIVE UP in order to get ONE MORE UNIT OF X

Measures MARGINAL value of one more unit of X... that value being measured in units of Y

The Marginal Rate of Substitution (MRS) DECREASES

0 Slices of Pizza - Total Utility - 0 utils, MUx = 0

1 Slice of Pizza - Total Utility - 150 utils
How to find MUx: 150/1 = 150 --> Marginal Utility (MUx) = 150

2 Slices of Pizza - Total Utility - 250 utils
How to find MUx: 100/1 = 100 --> Marginal Utility (MUx) = 100

Denominator = Change in quantity
So if the Quantity went from 1 --> 2 Slices of Pizza, you put 1 in the denominator because that's the difference in Quantities

Numerator = Take the total utility from the previous quantity (If you are looking at 2 slices, take the utility from 1 slice) and subtract Total Utility of 2 pizza slices - 1 Pizza slice to get your numerator

# of slices of pizza vs. total utility vs. MU
2 250 100
3 325

MU for 3 = 325 - 250 = 75 --> 75/1 = 75 MU

SAME indifference curve

If the utils increase --> Above the original indifference curve

If the utils decrease --> Below the original indifference curve

Higher utility

NO, NEVER

DOWNWARD

then you have an UPWARD sloping indifference curve

Look like regular downward sloping demand curves

One line in middle, one line lower (lower utility), one line higher (higher utility)

L-shaped

One higher and one lower (Indifference Curve 1 and Indifference Curve 2)

Shows all combinations of TWO goods, which cost the consumer the SAME

NEGATIVE (-) price of the good on the X-axis / the good on the Y-axis

Ex: P min. to France = 30 cents
P min. home = 10 cents
Budget=B=30

Slope of this line (Mins. home on X, Mins to France on Y)
--> Slope of Budget Constraint = -Pf/PH
----> -30/10 = -3

Px(X) + Py(y) = B

*ALWAYS has to equal budget

To get the equation of the LINE:
- Need to rearrange by isolating "Y"

--> Y= B/Py - (Px/Py)X

Slope = -Px/Py
--> OR rise/run
-(B/Py) / (B/Px) --> -Px/Py

Look at indifference curves and budget constraints together

Indifference Curves, How many? = Infinite Number of Indifference Curves

Budget Constraints: How many Budget Constraints?
--> ONE budget constraint

Indifference Curve slopes down and the Budget Constraint is a straight line down that crosses through a point on the back of the indifference curve

Consumer Optimum (Point O): the HIGHEST UTILITY you can get while staying within your budget constraint
(Given what you've got to spend and given the consumer goods)

Formula for O: -MRSyx = -Px/Py

Another way to express MRS:
MUx/MUy = -Px/Py

Rearrange by multiplying each side by -1:
MUx/Px = MUy/Py

What this equation says is, @ the OPTIMUM, the Marginal Utility PER DOLLAR SPENT will be the same for both goods
(**PER DOLLAR SPENT**)

MUx/Px = MUy/Py
--> Bang for the Buck Condition: Marginal Utility per dollar spent is the same for both goods

@ O: Slope of Indifference Curve = Slope of Budget Constraint

- MRS = Slope of Budget Constraint
Slope of Budget Constraint: -Px/Py
--> Rearranged: MUx/Px = MUy/Py

At O: MUx/Px = Marginal Utility PER DOLLAR SPENT on good X
and MUy/Py = Marginal Utility PER DOLLAR SPENT on good y

-MRSy,x = -Px/Py
-MUx/MUy = -Px/Py

INDIFFERENCE CURVE is TANGENT to the Budget Constraint

(35 utils/$5) = They will get 7 additional utils (7 Utils per dollar)

(56 Utils/$8) = 7 Utils per dollar

Since you get the SAME number of Utils from both the Marginal Utility / Price of each good, you are at CONSUMER OPTIMUM

If you spent $1 more dollar on X, you get 7 more utils and if you spent $1 more dollar on Y you'd also get 7 more Utils

REALLOCATE your budget

Buy more of one to get more "Bang for your Buck", and spend less of your budget on the other

(X, Y)

The Opportunity Cost of your decision

When the budget INCREASES, the budget constraint SHIFTS to the RIGHT but the SLOPE DOESN'T CHANGE because the PRICES did not change (Vert. and Horiz. Intercepts INCREASE)

When the budget DECREASES, the budget constraint SHIFTS to the left LEFT (Vert. and Horizontal Intercepts DECREASE)

INCOME goes up, then budget or how much you are able to spend on the good goes up

One of the goods can be an INFERIOR good, and if the budget goes UP, consumers consume LESS of an INFERIOR good

This would cause the SAME shift in the budget constraint and the SAME change in slope as before, HOWEVER the curve shifts either left or right depending on if the budget decrease or increased

1. Good is a normal good

2. Good is an inferior good

PRICE GOES UP: The line PIVOTS around the horizontal intercept - the vertical intercept MOVES DOWN

PRICE GOES DOWN: The line PIVOTS around the vertical intercept - the horizontal intercept MOVES UP

ALWAYS PIVOTS

OPTIMUM bundle shifts down to a point still tangent to the budget constraint

Shifts from O, BC, IC
to O prime, BC, IC

Doesn't have anything to do with whether the two goods involved are SUBSTITUTES for one another
--> They DO NO HAVE to be be related as substitutes

SE: If you have 2 goods, when the price goes down for one good, then you buy more of that good
--> Change in consumption DUE TO CHANGE in relative prices

THESE ARE ALWAYS OPPOSITES

If one goes DOWN, the other GOES UP

If one goes UP, the other GOES DOWN

has to do with price change in relative terms

Because they are NORMAL goods, they are always the same

They both always go in the SAME direction

Up, up
or Down, Down

One of the quantities goes UP or DOWN

And the other quantity depends on if IE is greater than or less than SE

UP: If IE > SE
DOWN: If SE > IE

Which one is stronger? Which one outweighs the other
--> in this situation, INCOME EFFECT outweighs and is stronger than the SE, this is not always the case though

Income doesn't change but when the PRICE of something you buy goes DOWN/UP it's like your income either INCREASED/DECREASED

You have to know what is NORMAL and what is INFERIOR

the Substitution Effect

NO, it is based on individual preferences

1. The good is NORMAL
---> SE and IE work in the same direction
----> Substitution Effect DOES NOT determine if the good is normal or inferior

2. The good is INFERIOR, but the SE outweighs the IE

What do you do with an INFERIOR good when you're richer?
--> you buy less

Depends on which is stronger, the income effect or the substitution effect

Which one outweighs the other?

When P goes down, SE always makes Q go up

If IE > SE, P of a good goes down and Qd goes down too
--> Called a GIFFEN GOOD

For a good to be Giffen:
1. It must be an inferior good and

2. IE must outweigh the SE
Inferior good, Income Effect = STRONGER than the Substitution Effect

NOT ALL inferior goods are GIFFEN GOODS

GO DOWN

Because if you become richer, you buy less inferior goods

the SAME direction

Substitution OUTWEIGHS the income effect

LOWER
(Indifference curves cannot cross)

You always want the HIGHEST indifference curve you can reach given his income and prices of 2 goods

EQUAL TO

It slopes UPWARD

If SE > IE, DOWNWARD sloping

On the HIGHEST indifference curve given the budget constaint

Research finds that consumption of olive oil reduces the risk of heart disease

(Taste and Preferences = Shifter of Demand)

MUx/MUy = Px/Py

Price go DOWN

Quantity go UP

(Input cost = Shifter of Supply)

Be derived by moving a consumer's BUDGET CONSTRAINT as the price of the good changes

The prices of the inputs used to produce the good

The cross-price elasticity of demand is POSITIVE

A RIGHTWARD shift of a supply curve

A decrease in the price of lumber

(Reduction in Input Cost = Supply Shifter)

Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous

Complements

the fewer the available substitutes

Greater than 1

flatter the demand curve will be

below the equilibrium price, causing a shortage

a price floor

quantity demanded changes as consumer income changes

Both the supply and demand curves have shifted to the right. As a result, there has been an increase in the equilibrium quantity and an uncertain effect on the equilibrium price.

c. are always bowed in toward the origin