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Change in Demand
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Given an upward sloping supply curve, an increase in demand will lead to a higher equilibrium price and a greater equilibrium quantity. A decrease in demand will lead to a lower equilibrium price and a lower equilibrium quantity
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Change in Supply
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Given a downward sloping demand curve, an increase in supply will lead to a lower equilibrium price and a greater equilibrium quantity. A decrease in supply will lead to a higher equilibrium price and a lower equilibrium quantity
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An increase in supply and a decrease in demand
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-Decrease in the equilibrium price because both the increase in supply and the decrease in demand work to push this price down
-The impact on equilibrium quantity is indeterminate because the increase in supply increases the equilibrium quantity and the decrease in demand decreases it
-The impact on equilibrium quantity is indeterminate because the increase in supply increases the equilibrium quantity and the decrease in demand decreases it
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An increase in demand and supply
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-Increase in equilibrium quantity
-Price is indeterminate
-Price is indeterminate
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Price ceiling
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A legally established maximum price
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Price floor
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A legally established minimum price
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Unintended consequences
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The secondary effects of an action that may occur as well as the initial effects
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Both price floors and ceilings
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Reduce the quantity exchanged in the market
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If a price floor was set at a current price, which of the following would cause a surplus as a result?
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-A decrease in demand
-An increase in supply
-An increase in supply
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Price elasticity of demand
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-The measure of the responsiveness of quantity demanded to a change in price
-Defined as the percentage change in quantity demanded divided by the percentage change in price
-In theory it is always negative (inverse relationship between price and quantity demanded) but for simplicity it is expressed in absolute terms which means it is a positive number
-Defined as the percentage change in quantity demanded divided by the percentage change in price
-In theory it is always negative (inverse relationship between price and quantity demanded) but for simplicity it is expressed in absolute terms which means it is a positive number
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Elastc
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When the percentage change in quantity demanded is greater than the percentage change in price
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Inelastic
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When the percentage change in quantity demanded is less than the percentage change in price
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Unit elastic of demand
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Demand with a price elasticity of 1; the percentage change in quantity demanded is equal to the percentage change in price
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Price elasticity of demand depends on three factors
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-The availability of close substitutes - goods with close substitutes tend to have more elastic demands
-The proportion of income spent on the good - the smaller the proportion of income spend on a good, the lower its elasticity of demand
-The amount of time that has elapsed since the price change - the more time that people have to adapt to a new price change, the greater the elasticity of demand
-The proportion of income spent on the good - the smaller the proportion of income spend on a good, the lower its elasticity of demand
-The amount of time that has elapsed since the price change - the more time that people have to adapt to a new price change, the greater the elasticity of demand
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Total revenue
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-The amount sellers receive for a good or service, calculated as the product price times the quantity sold
-Simply price of a good times the quantity of a good
-Simply price of a good times the quantity of a good
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If the demand curve is relatively elastic
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total revenue will vary inversely with a price change
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Total revenue decreases (elastic)
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Price increases
Quantity decreases
Quantity decreases
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Total revenue increases (elastic)
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Price decreases
Quantity increases
Quantity increases
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If the demand curve is relatively inelastic
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total revenue will vary directly with a price change
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Total revenue decreases (inelastic)
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Price decreases
Quantity increases
Quantity increases
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Total revenue increases (inelastic)
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Price increases
Quantity decreases
Quantity decreases
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The slope of demand curves can be used
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to estimate their relative elasticities of demand
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A straight line demand curve would
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have a higher elasticity of demand near its top than near its bottom
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A linear demand curve is more price elastic
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at higher price ranges and more price inelastic at lower price ranges; and it is unit elastic at the midpoint
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If a demand curve was relatively inelastic in the short run but elastic in the long run, a price increase
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decrease total revenue in the short run and decrease total revenue in the long run
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Cross price elasticities of demand
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-The measures of the impact that a price change of one good will have on the demand of another good
-Indicates not only the degree of the connection between the two variables but also whether the goods in question are substitutes or complements for one another
-Indicates not only the degree of the connection between the two variables but also whether the goods in question are substitutes or complements for one another
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Calculate cross price elasticities of demand
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The percentage change in the demand of one good (good A) divided by the percentage change in price of another good (good B)
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If cross price elasticities of demand is positive
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We can conclude that the two goods are substitutes because the price of one good and the demand for the other move in the same direction
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If cross price elasticities of demand is negative
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We can conclude that the two goods are complements because the price of one good and the demand for the other move in the opposite directions
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Income elasticity of demand
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-The percentage change in demand divided by the percentage change in consumers' income
-Measure of the relationship between a relative change in income and the consequent relative change in demand, ceteris paribus
-Indicates whether goods are normal or inferior
-Measure of the relationship between a relative change in income and the consequent relative change in demand, ceteris paribus
-Indicates whether goods are normal or inferior
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Calculate income elasticity of demand
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Percentage change in the demand divided by the percentage change in income
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If income elasticity of demand is positive
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The good is a normal good because income and demand move in the same direction
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If income elasticity of demand is negative
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The good is an inferior good because the change in income and the change in demand move in opposite directions
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If the cross price elasticity of demand between two goods is negative, we know that
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They are complements
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If the income elasticity of demand for good A is 0.5 and the income elasticity of demand for good B is 1.5, then
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Both A and B are normal goods
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If good X has a negative cross price elasticity of demand with good Y and good X also has a negative income elasticity of demand, then
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X is a complement for Y and X is an inferior good
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Price elasticity of supply
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The measure of the sensitivity of the quantity supplied to changes in price of a good
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Price elasticity of supply calculate
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Percentage change in the quantity supplied divided by the percentage change in price
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Goods with a supply elasticity that is greater than 1
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are said to be relatively elastic in supply
-A 1% change in price will result in a greater than 1 percent change in quantity supplied
-A 1% change in price will result in a greater than 1 percent change in quantity supplied
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Supply elasticity time
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Supply tends to be more elastic in the long run than in the short run
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Taxes
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-If demand is relatively less elastic than supply in the relevant tax region, the largest portion of the tax is paid by the consumer
-If demand is relatively more elastic than supply in the relevant tax region, the largest portion of the tax is paid by the producer
-If demand is relatively more elastic than supply in the relevant tax region, the largest portion of the tax is paid by the producer
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For a given increase in price, the greater the elasticity of supply, the greater the resulting
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Increase in quantity supplied
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If the demand for gasoline is highly inelastic and the supply is highly elastic, and then a tax is imposed on gasoline, it will be paid
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largely by the buyers of gasoline
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