Microeconomics Unit 2 Review

Demand is the different quantities of goods that consumers are willing and able to buy at different prices. Demand is the entire relationship represented with a demand curve.

The quantity buyers are willing and able to buy of a good or service at a particular price during a particular period, all other things unchanged.

There is an INVERSE relationship between price and quantity demanded. Represented with the negative (downward) slope of the demand curve.

a shift in the demand curve (results from change in factors other than price). Changes in price don't shift the curve! A change in price is movement ALONG the demand curve.

A variable that can change the quantity of a good or service demanded at each price.

1. consumer preferences
2. the prices of related goods and services (substitutes/complements)
3. income (normal/inferior goods)
4. demographic characteristics
5. buyer expectations

satisfaction

As you consume more units of any good, the additional satisfaction from each additional unit will eventually start to decrease. In other words, the more you buy of ANY GOOD the less satisfaction you get from each new unit.

A demand curve is a graphical representation of a demand schedule. A demand curve is downward sloping, showing the inverse relationship between price (on the y-axis) and quantity demanded (on the x-axis). When reading a demand curve, assume all outside factors, such as income, are held constant.

Substitutes are goods used in place of one another.
If the price of one increases, the demand for the other will increase (or vice versa). Substitutes have a direct relationship.
Ex: If price of Pepsi falls, demand for coke will decrease.

Complements are two goods that are bought and used together.
If the price of one increases, the demand for the other will fall. (or vice versa). Complements have an inverse relationship
Ex: If price of skis falls, demand for ski boots will increase.

As income increases, demand increases
As income falls, demand falls
Ex: Luxury cars, Sea Food, jewelry, homes

As income increases, demand falls
As income falls, demand increases
Ex: Top Romen, used cars, used clothes

Supply is the different quantities of a good that sellers are willing and able to sell (produce) at different prices. Supply is the entire relationship represented with a supply curve.

The quantity sellers are willing to sell of a good or service at a particular price during a particular period, all other things unchanged.

There is a DIRECT (or positive) relationship between price and quantity supplied. Represented by the positive (upward) slope of the supply curve.
Note: This makes sense because at higher prices profit seeking firms have an incentive to produce more

Movement along the supply curve caused by a change in price

A shift in the supply curve (results from a change in factors other than price)

A variable that can change the quantity of a good or service supplied at each price.

1. prices of factors of production
2. returns from alternative activities
3. technology
4. seller expectations
5. natural events
6.the number of sellers

-Draw supply and demand
-Label original equilibrium price and quantity

-Did it affect supply or demand first?
-Which determinant caused the shift?
-Draw increase or decrease

-Label new equilibrium
-What happens to Price? (increase or decrease)
-What happens to Quantity? (increase or decrease)

If TWO curves shift at the same time, EITHER price or quantity will be indeterminate

Maximum legal price a seller can charge for a product.
Goal: Make affordable by keeping price from reaching Eq.
Results in a shortage
To have an effect, a price ceiling must be below equilibrium

Minimum legal price a seller can sell a product.
Goal: Keep price high by keeping price from falling to Eq.
Results in a surplus
To have an effect, a price floor must be above equilibrium

an agent other than the seller or the buyer who pays part of the price of a good or service.
Consumers use more than they would in the absence of third-party payers
Providers are encouraged to supply more than they otherwise would
The result is increased total spending

How responsive is the quantity demanded to price change?
Does it change a lot? A little? You need a measure of responsiveness...

Shows how sensitive quantity is to a change in price
The ratio of the percentage change in a dependent variable to a percentage change in an independent variable

the percentage change in quantity demanded of a particular good or service divided by the percentage change in the price of that good or service, all other things unchanged.

Change in quantity between two points
divided by
average value of quantity demanded
over
change in price between two points
divided by
average value of price

The lower the price and the greater the quantity demanded, the lower the absolute value of the price elasticity of demand.
As we move down the demand curve, equal changes in quantity represent smaller and smaller percentage changes in quantity. Alternatively, equal changes in price represent larger and larger percent changes in price. Thus as we move down the demand curve, the absolute value of elasticity measure declines.

Price per unit times the number of units sold. Basically, price per unit times quantity demanded.

The impact of price change on total revenue depends on the initial price and, by implication, the original elasticity

Situation in which the absolute value of price elasticity of demand is greater than 1. (Upper half of demand curve)

If quantity demanded changes by a larger percentage than price, total revenue will change in the direction of quantity change (i.e., a reduction in quantity demanded will reduce total revenue; an increase in quantity demanded will increase it)

Situation in which the absolute value of price elasticity is equal to 1. (Midpoint of demand curve)

If price and quantity demanded change by the same percentage, total revenue does not change

Situation in which the absolute value of price elasticity of demand is less than 1. (Lower half of demand curve)

If price changes by a larger percentage than quantity demanded, total revenue will change in the direction of the price change (i.e., a reduction in price will reduce total revenue; an increase in price will increase it).

Situation in which the price elasticity of demand is zero. Price changes have no effect on quantity demanded. Therefore, percentage change in quantity demanded is zero, which in turn makes elasticity zero. (Vertical demand curve)

Situation in which the price elasticity of demand is infinite. Even the smallest price changes have huge effects on quantity demanded. Basically, price doesn't change (i.e., percentage change in price is zero). (Horizontal demand curve)

Can determine whether demand is more or less price elastic.
The price elasticity of demand for a good or service will be greater in absolute value if there are many close substitutes available for it. It will be less if there are no close substitutes .

Can determine whether demand is more or less price elastic.
The greater the importance of an item in household budgets, the greater the absolute value of the elasticity of demand is likely to be (i.e., the greater the response to change in price)

Can determine whether demand is more or less price elastic.
The absolute value of the price elasticity of demand will be greater when more time is allowed for consumer responses.

shows how sensitive a product is to a change in price of another good
Percent change in quantity demanded of one good or service at a specific price divided by the percent change in the price of a related good or service (shift in demand curve)
If elasticity is negative, the goods are complements (shows inverse relationship).
If elasticity is positive, the goods are substitutes (shows direct relationship).

Income elasticity shows how sensitive a product is to a change in INCOME
The percentage change in quantity demanded at a specific price divided by the percentage change in income that produced the demand change, all other things unchanged
If elasticity is negative (shows inverse relationship) then the good is inferior
If elasticity is positive (shows direct relationship) then the good is normal

shows how sensitive producers are to a change in price.
percentage change in quantity supplied of a good or service divided by the percentage change in its price, all other things unchanged. (direct relationship positive elasticity)

Elasticity of supply is based on time limitations.
Producers need time to produce more.
Inelastic = Insensitive to a change in price (Steep curve)
Most goods have inelastic supply in the short-run
Elastic = Sensitive to a change in price (Flat curve)
Most goods have elastic supply in the long-run
Perfectly Inelastic = Q doesn't change (Vertical line)
Set quantity supplied
If the period of time under consideration is a few years rather than a few months, the supply curve is likely to be much more price elastic

When applied to labor supply, the price elasticity of supply is usually positive but can be negative. If higher wages induce people to work more, the labor supply curve is upward sloping and the price elasticity of supply is positive. In some very high-paying professions or other unusual circumstances, the labor supply curve may have a negative slope, which leads to a negative price elasticity of supply.