Demand and Supply Analysis: Intro Flashcards
the economic tools for understanding how product and resource markets function and the competitive characteristics of different industries Markets for goods and services to consumers are referred to as goods markets or product markets. Markets for factors of production (raw materials, goods and services used in production) are referred to as factor markets. Goods and services used in the production of final goods and services are referred to as intermediate goods.
Distinguish among types of markets
Factors Markets (where firms buy)
Goods or Products Markets (services and finished goods) (where firms sell)
Capital Markets: Where firms raise money by selling debt and equities or trade
Principles of demand
The Qdx=f(Px,I,Prelated goods)
Law of Demand (most important factor in Demand analysis: As a goods OWN P rises, D falls)
Other variables - consumers inoome, taste preferences, prices of other goods that serve as substitutes or compliments
Principles of Supply
Law of Supply: Greater Quantity is supplied at higher prices
Supply depends on the selling price as well as the costs of production which in turn depend on technology, the cost of labor, the cost of other inputs into the production process
Demand curve shifts
Income, substitutes, complements, taste, population, expected prices, etc
Demand curve movements
Price changes
Supply curve moves
Price Changes
Supply curve shifts
Technology, Price of Inputs, Sales Tax, Expected Prices, etc aka changes in the prices of inputs
The process of aggregating demand curves
Simple, distribute the #consumers amongst the linear demand function
Qd=1-2P
100 people
so AggQd=100(1-2p)
To get market demand curve, invert
Slope is the coefficient of Qd in inverse
the process of aggregating supply curves
distribute the #irms amongst the linear supply functions
Qs=1-2P
100 firms
so AggQs=100(1-2p)
To get market supply curve, invert
Slope is the Coefficient of Qs in inverse
The concept of partial equilibrium
Assumes that activity in one market does not affect others
the concept of general equilibrium
Determines prices and quantities in all markets simultaneously (feedback effect)
What brings all the markets to a general
equilibrium is the change in relative prices
Mechanisms by which markets achieve equilibrium
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Stable equilibrium
Price changes due to surplus or shortage will converge to market equilibrium
Unstable equilibrium
Demand and Supply both downward sloping (labor market and backward bending supply curve)
Supply more elastic > Demand (supply intersects demand from below)
Price Bubbles
The consequence of irrational behavior, not intrinsic value
Instances of stable equilibria
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Instances of unstable equilibria
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Calc, Interpret individual Demand
Qd=B-P-Pc+Ps+I+A(advertising)
Calc, Interpret aggregate Demand
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Calc, interpret inverse demand (Price as a function of Qd)
P=1/2(b)-Q-Pc+Ps+I+A
Calc, Interpret inverse supply
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Interpret individual demand curves
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Interpret individual supply curves
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Interpret aggregate demand curves
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Interpret aggregate supply curves
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Calc, Interpret consumer surplus
Consumers willingness to pay - Actual cost of the good
Calc, Interpret producer surplus
Producer surplus or PROFIT is the difference between TC (area between MC and Q) and TR (P*Q)
Calc, Interpret total surplus
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Calc, Interpret the amount of excess demand associated with non-equilibrium price
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Calc, Interpret the amount of excess supply associated wtih non-equilibrium price
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Describe types of auctions
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Calculate the winning prices of an auction
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Describe how government regulation and intervention affect demand
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Describe how government regulation and intervention affect supply
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Forecast the effect of the introduction of a price ploor on price and quantity
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Forecast the effect of the removal of a price floor on price and quantity
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Forecast the effect of the introduction of a price ceiling on price and quantity
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Forecast the effect of a removal of a price ceiling on price and quantity
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Calc, Interpret price elasticity of demand
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Describe factors that affect price elasticity of demand
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Calc, Interpret income elasticity of demand
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Describe factors that affects income elasticity of demand
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Calc, Interpret cross-price elasticity of demand
Cross Price elasticity of Demand :denotes: The ratio in the % change in the Qd of a good relative to a %change in the price of a related good
Substitute relationship ( +Y = +X) An increase in the P of a good increases the D for another good as an increase in the P of one good drives consumers to increase their purchases (D) of the other now less expensive good.
Cross price - more + : substitutes, more - : complements
Inverse, - , complements, cars and gasoline
Positive, +, substitutes, brands of bread
Perfect, shoes, come in pairs must be bought together
Describe factors that affect cross-price elasticity of demand
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Effect of an increase in income
Demand +, P Q +
Effect of an Increase in Oil Prices (supply shock)
Qs falls, P +
Income AND oil increase
Demand +, Supply - (cuz, oil shock), higher P at old Q
Alias for supply curve
MC curve
Price Ceiling
Rent control - Price is set BELOW market price
Price Floor
Subsidy - Price is set ABOVE market price
Intermediate Goods
Goods USED IN the production of FINAL GOODS
Subs, Comps and D
Psub+ = +Dx
Pcomp+ = -Dx
Qd is a simple Linear function
Qd= N - Px
Where a $1 increase in the P of X decreases demand by its coefficient
“Analyze Demand”
The quantity a consumer is willing to buy clearly depends on a number of different factors called variables
Linear Equation>Concentrate a relationship (plug in variables) Price of good Y denotes Income since this is the most important relationship> Isolate Px>Invert the Demand Function (Solve Px in terms Q) >AKA Swap n Solve!! = Inverse Demand Function interpreted as the a 1 unit change in X changes Y by ~N
An inverse relationship would indicate that…
…the Y and X have a negative cross-price elasticity of demand and thus are complements
Economists use…
simple linear equations to approximate real-world demand and supply functions in relevant ranges
Linear Demand Function + Inverted Linear Demand Function =
The graph of the inverse demand function is called the demand curve
Demand Curve Interpretation
“either the highest quantity a household would buy at a given price or the highest price it would be willing to pay for a given quantity.”`
Qdx Interpretation
The highest quantity a household would buy at a given price
Px interpretation
The highest price a household would be willing to pay for a given Q
Slope of the Demand Curve
ChangeP/ChangeQ
The slope of the Demand Curve is the…
…coefficient on Qd in INVERSE!
“Calculate the vertical intercept (price-axis intercept) of the demand curve if income increases to €3000 per month.”
“Calculate the vertical intercept (price-axis intercept) of the demand curve if income increases to €3000 per month.”
chainge I, income to 3000, solve linear (collect like terms), solve for Px (inverse demand function)
“Calculate the vertical intercept (price-axis intercept) of the demand curve if income increases to €3000 per month.”
“Calculate the vertical intercept (price-axis intercept) of the demand curve if income increases to €3000 per month.”
chainge I, income to 3000, solve linear (collect like terms), solve for Px (inverse demand function)
