Section 1 Flashcards
Demand Curve
Horizontal: for any given price, how much of the good will consumers want to consume?
Vertical: for any given quantity what is the marginal consumers willingness to pay (value) for one more unit?
Why does demand slopes downward?
because when price goes up(down), quantity demanded decreases(increases) on two “margins.”
Intensive margin
people already in the market decrease(increase) the amount they want
to consume at any given price.
Extensive margin:
some people will exit(enter) the market, i.e. stop(start) consuming the good) as the price moves above (below) their reservation price.
What are Comparative Statics?
comparative statics of normal goods when income goes up
the demand curve shifts up
comparative statics of normal goods when income goes down
the demand curve shifts down
Normal Good
Inferior Goods
Comparative statics of Inferior goods when income goes down
the demand curve shifts up
Comparative statics of Inferior goods when income goes up
the demand curve shifts down
Substitutes
Compliments
Comparative statics: When, Goods X and Y are substitutes, when price of good X goes up
the demand curve for good Y shifts up
Comparative statics:When, Goods X and Y are substitutes, when price of good X goes down
the demand curve for good Y shifts down
Comparative statics: Goods X and Y are complements, when the price of good X goes up
the demand curve for good Y shifts down
Comparative statics: Preferences
anything that makes the good seem more(less) valuable or desirable or
necessary will shift the demand curve up(down).
anything that makes the good seem less valuable or desirable or necessary will shift the demand curve down.
Factors that determine how steep the demand curve will be.
- Substitution effect:
- Income effect, two parts:
Income Effect: –How would demand change for this good if income went up(down) without a price
change? [Would it increase (normal good) or decrease (inferior good)?]
Budget share: –How much impact will the price change actually have on consumers’ purchasing
power? [How big of a share of consumers’ budgets does it represent?]
Supply curve and be thought of two ways
- Horizontal: for any given price, how much will the industry be willing to supply?
– For flat long-run supply curve at a price equal to the long-run efficient per-unit cost, the industry will supply any quantity demanded. At any other price, in the long run, the quantity supplied by the industry will be zero. - Vertical: for any given quantity, what is the per-unit cost of producing one more unit?
Slope of supply curve: Short Run
Supply slopes upward because:
a) Short-run is defined as the time horizon within which firms cannot increase their short-run non-variable inputs, so variable inputs operate less efficiently,
i.e. at higher marginal per-unit cost.
b) In the short run, firms cannot enter or exit the industry to increase or decrease
industry output.
Slope of supply curve: Long-run
Supply is horizontal if all firms have access to the same inputs and the same
technology
Supply slopes upward if some firms have exclusive access to cheaper or more
effective inputs and/or technology (competitive advantage) , allowing them to
operate at lower per-unit cost.
Horizontal Long-run supply curve
Supply is horizontal if all firms have access to the same inputs and the same
technology, because firms enter(exit) the industry in response to short-run
increases(decreases) in price due to the short-run presence of industry-wide
profit(loss), until the price once again goes back down(up) to the point at which
there is no profit(loss) available.
Supply sloping upwards
Supply slopes upward if some firms have exclusive access to cheaper or more
effective inputs and/or technology (competitive advantage) , allowing them to
operate at lower per-unit cost. Since firms enter(exit) the industry in the order of
lowest(highest) per-unit cost, the price will be determined by the per-unit cost of
the marginal firm, which will be higher(lower) as the price goes up(down).
