lecture 13

Question 1

What determines prices?

Answer 1

• demand
• competition

Question 2

What is a demand curve?

Answer 2

• The buying side of the market
• Relationship that tells the quantity that consumers would buy of a good at each possible price
  Represents consumer’s willingness to pay (WTP) for a good
• downward sloping curve
• reflects the negative relationship between the quatity demanded of a good and its price
  -relationship reflects optimizing behaviour on the part of the households (consumers)
  It results from consumers optimal choice (utility maximization)

Question 3

what does the market demand aggregates?

Answer 3

the demand of individual consumers. meaning that at each possible price, we add up the quantity demanded by each individual consumer

Question 4

what is the supply curve?

Answer 4

• the selling side of the market
• relatioship that tells the quntity that firms would sell of a good at each possible price
• positive relatioship between thw quantity supplied of a good and its price
• the relationship reflects optimizing behavior on the part of firms
• upward sloping curve

Question 5

what is the equilibrium in the market?

Answer 5

the price is such that the quantity demanded is equal to the quantity supplied

Question 6

what happens if the price is bellow price at the equilibrium?

Answer 6

quantity supplied would be less that the demanded one

Question 7

what happens if the price is above price at equilibrium?

Answer 7

quantity suplied would be more thant the demanded one

Question 8

what happens if occurs a change in the quantity supplied or quantity demanded?

Answer 8

because the price changes
- movement along the curve
at the same price
- shift of the curve

Question 9

what causes the demand curve to shift?

Answer 9

in general anything that changes the desirability of the good at a given price
it can be: change in
- price
- taste, news
- price of a substitute
- demographics

Question 10

what is price elasticity of demand?

Answer 10

• it is a measure of responsiveness of quantity demanded (consumers) to a price change
• it is defined as the percentage in quantity demanded that occurs in a response to a 1% increase in price

Question 11

how can the price elasticity of demand be calculated?

Answer 11

(1/slope→ derivative of Q)* P/Qd

Question 12

what type of elasticity can a good have?

Answer 12

• elasticity > 1 → elastic → quantity demanded changes proportionally more than the price
• elasticity < 1 → inelastic → quantity demanded changes proportionally less than the price
• elasticity = 0 → perfectly inelastic
• elasticity = infinity → perfectly elastic

Question 13

what can cause a shift in supply curve?

Answer 13

if demand is highly
- inelastic→ leads mainly to a change in price, with little change in quantity
- elastic → leads mainly to a change in quantity, with little change in price