Micro 2 Flashcards
Normal/superior vs inferior goods
Normal/superior: buy more as income increases
Inferior: buy less as income increases
Substitutes
Good used in place of each other
price of one increases, demand for other increases
Complementary
Used in conjunction with one another
Price increases for one, demand decreases for both
Consumer expectations
Expectations of higher prices in the future lead to increase in current demand
FOMO
which way will increase/decrease in supply/demand shift the curve?
INCREASE:
supply right
demand right
DECREASE:
supply left
demand left
anything that makes production cheaper will shift supply which way?
to the right
S increases
market equilibrium
where supply and demand intersect
only place to satisfy buyers AND sellers
results of:
1. D in S in
2. D de S de
3. D in S de
4. D de S in
- P? Q in
- P? Q de
- P in Q?
- P de Q?
results of price ceilings
Black markets
(below equilibrium price)
results of price floors
surplus
(above equilibrium price)
formula for price elasticity of demand
E = %change Q/%change P
always absolute value!
E>1 means elastic
When E=1 what does that mean
unit elasticity
perfectly elastic demand
-An increase in P results in sales of 0
-horizontal demand curve
perfectly inelastic demand
-change in P has no influence on Q
-vertical demand curve
where on the curve is demand more elastic?
upper left, E>1
middle, E=1
lower right, E<1
Total revenue test
TR = PxQ
Elastic- A decrease in P will increase TR
Inelastic- A decrease in P will decrease TR
Unit elastic- decrease in P will not change TR
determinants of elasticity…
1. substitutes?
2. trade barriers?
3. specificity?
4. prop. of income?
5. luxuries vs necessities?
6. time
- more substitutes=more elastic
- lowering trade barriers increases substitutes= more elastic
- more narrow=more elastic
- lower price= inelastic
- most necessities=inelastic
- elasticity increases over time (develop taste for substitutes)
Law of supply
a positive, direct relationship between P and Q supplied
this is why the S curve is up sloping
so… elasticity of supply will not be negative
Time- the main determinant of supply
1. market period
2. short run
3. long run
- producers are unable to change output so supply is perfectly inelastic
- plant size is fixed, but firm is able to use its plant more or less intensively
- all resources are variable, firms may enter or exit market
cross elasticity of demand
E= %changeQ of Y/ %changeP of X
measures effect of a change in P of one good on the Q demanded of different good
Positive= substitute goods
Negative= Complementary goods
0 or near 0= independent goods
income elasticity
E= %changeQ/ %change income
positive= normal goods
negative= inferior goods
consumer surplus
-what
-where on graph
difference between what consumers are WILLING to pay for one unit and the market price for one unit
-above P equilibrium until D curve
producer surplus
-what
-where on graph
difference between market price and what producers are WILLING to sell one unit for
-below P equilibrium until S curve
Efficiency Loss (Deadweight loss- DWL)
-what
-where on graph
when a good is either over or under-produced there is a loss in PS and CS
-draw lines to mark surplus (QD and QS) and then from the left half shade between the D and S curve until the left surplus line
Excise tax
production tax- will shift supply to the left
the more inelastic the D is, the more a tax burden will be shifted to consumers
Progressive tax vs regressive tax
pro (aka income tax)= average tax rate INCREASES as taxpayer’s income INCREASES
reg (aka sales tax)= average tax rate DECREASES as taxpayer’s income INCREASES
