chapter 3 Flashcards
a graph that shows all the different combinations of output of two goods that can be produced using available resources and technology.
Production possibilities frontier
fact that every economy face resource constraint.
scarcity
two categories of goods is central to PPF.
trade-offs
- As the number of guns increases, the number for butter falls, indicating that
to produce more of one good we must give up some of the other.
As the number of guns increases, the number of opportunity cost gets
larger/increasing
- PPF is concave or convex to the origin.
concave
- An interior point such as X means that the particular society is not doing the best it can; it is _
inefficient
insufficient resources to produce the indicated amounts of both guns and butter.
unattainable
- Points within frontier
efficient
represents the society’s best possible production.
efficient
For most economist, this refers to the quantity of goods or services that consumers are both willing and able to purchase at certain conditions.
Demand
What does the law of demand states?
- At a higher price, consumers will demand a lower quantity of a good.
is considered as a personalized capital good – which may grow through investments.
health
- Health is considered as a personalized capital good – which may grow through
investments
- The higher your health capital, the _ you will have to deal with illness later in life.
less chance
the amount of money a consumer pays for a good.
Price
- the amount of good that a consumer is willing and able to buy at a specific price.
Quantity Demanded (QD)
- The law of demand states that quantity demanded varies WHAT with price, ceteris paribus.
inversely
Other determinants/ factors remain constant.
CETERIS PARIBUS
At a lower price, the consumers have a greater PURCHASING POWER.
- INCOME EFFECT -
In case the price of good or service that the consumers buy increases, they look for substitutes with a lower price.
- SUBSITUTION EFFECT
Justification for the law of demand
- INCOME EFFECT
- SUBSITUTION EFFECT
represents the relationship of price to quantity demanded in the form of a table.
Demand schedule
Demand schedule
- Individual Demand Schedule
- Market Demand Schedule
illustrated by plotting the listed prices and quantities from the given schedule.
Demand curve
The demand curve slopes HOW, which means that quantity and price are inversely related.
downward from left to right
Demand Equation
𝑄𝑑 = 𝑎 − 𝑏𝑃
* Qd = Quantity Demanded
* P= Price
* b = slope
* A = constant term
Determinants of demand
- PRICE FACTOR
- NON-PRICE DETERMINANTS
- The most obvious factor that people consider in buying a certain good or service is the WHAT of the product.
price
if health care services offered are expensive,
only few people will be willing and able to avail such service.
- NON-PRICE DETERMINANTS OF DEMAND
i. Income
ii. Price of Related Goods
iii. Taste and Preferences
iv. Number of Buyers
v. Expectations
vi. Insurance
As people’s income changes, they may buy more or less of a particular good.
NON PRICE DETERMINANT OF DEMAND - INCOME
It is a product in which demand varies directly with income.
NON PRICE DETERMINANT OF DEMAND - INCOME
A. Normal good
It is a product in which demand varies inversely with income. Examples: Canteen food, Sardines, Instant Noodles
NON PRICE DETERMINANT OF DEMAND - INCOME
B. INFERIOR GOOD
reduces the price to the consumer at the point of service; given the lower price, a greater quantity of health care will be demanded
Insurance
It is a product that can be used in replacement of another product. When two goods are substitutes, an increase in the price of an alternative good will increase the demand for the other good.
NON PRICE DETERMINANT OF DEMAND - Price of related goods
A. SUBSTITUTE GOODS
It is a product that is always used together with another product. When two goods are complements, an increase in the price of good will decrease the demand for the other good.
NON PRICE DETERMINANT OF DEMAND - Price of related goods
B. COMPLEMENTARY GOOD
Several factors that may influence how consumers like and prefer goods include trends, seasonality, health hazards, advertisement, culture, and religion.
NON PRICE DETERMINANT OF DEMAND - Taste and Preference
Higher population or greater market size results in higher demand, while a lower population or market size takes there verse situation.
NON PRICE DETERMINANT OF DEMAND -Number of buyers
refer to the anticipation of consumers concerning future events, which can affect the demand for a good at present. Future prices and Future income.
NON PRICE DETERMINANT OF DEMAND - Expectations
happens whenever there is a change in price, ceteris paribus.
change in quantity demanded/supplied
is represented by a movement along a demand curve.
change in quantity demanded
occurs whenever there is a change in non-price determinants of Demand, ceteris paribus.
change in demand
represented by the shift of the demand curve
change in demand
For most economists, this refers to the quantity of goods or services that sellers are both willing and able to sell at certain conditions.
supply
- According to the law of supply, quantity supplied Is WHAT to price.
POSITIVELY RELATED
- Firms are more willing to sell _ at a higher price than sell at lower price.
more
the supply curve slopes HOW.
upward.
represented by a movement a long a supply curve
Change in Quantity Supplied
a change in supply occurs whenever there is a change in non-price determinants of supply.
change in supply
The change in supply is represented by the _ of the supply curve.
shift
inputs of Productions (raw materials, rents, wages of workers, and interests)
Non-Price determinants of supply - Input costs
Non-Price determinants of supply
- Input costs
- Technology
- Number of Producers
- Price of expectations
- Government Actions
- Unpredictable events
Advances in technology may change the level of supply. Technology improves the productivity of workers and increases the efficiency of the production process.
Non-Price determinants of supply - Technology
(Increase in producers, increase in Qs)
Non-Price determinants of supply - Number of Producers
(Increase in future price, decrease in present supply)
Non-Price determinants of supply - Price expectations
is an incentive provided to firms by the government that can improve the supply of a certain good.
subsidy
an enforced contribution imposed by the government to firms. This would result in increase production costs.
Tax
granting subsidies -> _Qs
increase tax rates -> _Qs
(Increase in supply)
(Decrease in supply)
- Labor and industrial disputes, machine failure, bad weather due to typhoons and floods, agricultural pests affecting crops, shortage of imported commodities due to global recession.
Non-Price determinants of supply
- Unpredictable events
DEMAND = SUPPLY
IV. Market Equilibrium
Under conditions of competition, the WHAT in a market will occur at the point where the demand and supply curves intersect.
equilibrium
This is the point at which demanders’ and suppliers’ plans agree.
MARKET equilibrium
Unchanging equilibrium at a point in time.
STATIC EQUILIBRIUM:
the excess supply which occurs when quantity supplied is greater than the quantity demanded.
Surplus
Qd<Qs
Surplus
the excess demand which occurs whenever the quantity demanded is greater than the quantity supplied.
Shortage
Qd>Qs
Shortage
Demand Function
Qd = a-bP
Supply Function
Qs= c+dP
If demand increases, what happens to the equilibrium price?
Increases
If demand increases, what happens to the equilibrium quantity?
Increase
If supply decreases, what happens to the equilibrium quantity?
Decreases
If both demand and supply increase, what happens to the equilibrium quantity?
Increases
If demand decreases and supply increases, what happens to the equilibrium price?
B) Decreases
If demand increases and supply decreases, what happens to the equilibrium quantity?
D) Cannot be determined
If both demand and supply decrease, what happens to the equilibrium price?
Cannot be determined
If both demand and supply decrease, what happens to the equilibrium quantity?
Decreases
If demand increases and supply decreases, what happens to the equilibrium price?
Increase
If demand increases and supply decreases, what happens to the equilibrium quantity?
cannot be determined
If both demand and supply decrease, what happens to the equilibrium price?
Cannot be determined
If supply increases, what happens to the equilibrium price?
Decreases
If demand decreases, what happens to the equilibrium quantity?
Decreases
A decrease in supply will generally cause what to happen to the equilibrium price?
Increase
If both demand and supply increase simultaneously, what is the most likely outcome for the equilibrium quantity?
Increase
Examining how the equilibrium will change in response to some economic event.
COMPARATIVE STATICS
These are Government Intervention
PRICE CONTROLS
What is a maximum price legally mandated by the government. In this case, the price is not allowed to rise to its equilibrium level
Price ceiling
Results in Shortage or Excess Demand.
Price ceiling
Example of Price Ceiling.
Rent Control
This is a minimum price legally mandated by the government. In this case, the price is not allowed to rise to its equilibrium level
A price floor
Example of price floor-
Minimum Wage Laws
Results in Surplus or Excess Supply
price floor
2 kinds of price controls
Price ceiling
Price floor
SENSITIVITY OR RESPONSIVENESS
Elasticity
measures how sensitive or responsive the consumers and producers are to the changes in economic variables in the marketplace particularly the price of a good.
- Elasticity
- -it can be likened to a rubber band: If it is elastic, it stretches more; if it is inelastic, it stretches a little.
Elasticity
TYPES OF ELASTICITY
Price Elasticity of Demand
Income Elasticity of Demand
Cross-Price Elasticity of Demand
Price Elasticity of Supply
- It measures the responsiveness of consumers in terms of quantity demanded to a change in the price of a good.
Price Elasticity of Demand
It measures responsiveness the of consumers in terms of quantity demanded to a change in income.
Income Elasticity of Demand
It measures responsiveness the of consumers in terms of quantity demanded to a change in the price of a related good—- a substitute or a complement.
Cross-Price Elasticity of Demand
It measures responsiveness the of producers in terms of quantity supplied to a change in the price of a good.
Price Elasticity of Supply
- A ______is an elastic good that has a high elasticity of demand.
luxury good
- Restaurant meals, sports cars, branded shoes, organic food, and high smartphones serve as examples of _____
luxury goods
- A change in the price of these products results in a relatively larger change in quantity demanded.
Elastic
is an inelastic good that has a low elasticity of demand.
- Necessity good
- Bread, clothing, gasoline, electricity, and medical care are some examples of _______
NECESSITY GOOD
When a change in price causes little or no change in quantity demanded or supplied.
- Inelastic
measures the responsiveness of demand in terms of income changes.
Income elasticity of demand
- Cars, home appliances and toiletries products are goods whose demand increases in response to an increase in income.
normal good
have a positive income elasticity coefficient
- Normal goods and services
- Second-hand clothing, canned sardines, and other inexpensive products are inferior goods whose demand falls as income increases.
INFERIOR GOOD
have a negative income elasticity of demand coefficient.
- inferior goods
- There are instances when the demand for a good is not influenced by the price of the good but rather the price of a related good.
CROSS-PRICE ELASTICITY OF DEMAND
The degree of responsiveness of demand to changes in the prices of related goods is closely linked to the __________
CROSS-PRICE ELASTICITY OF DEMAND
- Toothpaste brands, Colgate and Close-up, are _____________ as the increase in the price of the former will increase the demand for the latter.
SUBSTITUTE GOODS
- If the cross-price elasticity is __________, goods are considered substitutes.
positive
- Toothpaste and toothbrush are ___________ because a decrease in the price of the former will increase the demand for the latter.
COMPLEMENTARY GOODS
- If the cross-price elasticity are ________ goods are considered complements
negative,
calculated by getting the ratio between the percentage change in the quantity demanded of a good by the percentage change in the price of a related good.
The cross-price elasticity of demand
The extent of responsiveness of producers to a change in the price of a good or service is determined by the
price elasticity of supply
Health is considered as a personalized capital good which may grow through investments.
“Security in the future”
Grossman Model of Intertemporal Consumption Choice
