Supply and Demand Flashcards
Microeconomics
Microeconomics is the study of how individual firms and consumers make themselves as well off as possible in a world of scarcity and what those decisions mean for markets and the economy as a whole.
Trade-Offs
There are three trade-offs that society faces:
- What should be produced - based on the available resources - workers, capital, material, energy
- How to produce a certain output level - firms decide what inputs to use based on the outcome it’ll allow them to achieve (alternating the use of palm oil and coconut oil based on their respective price)
- Who gets the goods/services is based on constrains and resources of consumers given there is not an indefinite supply of goods/services
Prices
Prices link the relationship between the three trade-off questions society faces: what to produce, how to produce it, and who gets it. Prices influence the decisions consumers and firms make, and the interactions between consumers, firms, and the government influence prices
Market
A market is an exchange mechanism that allows buyers to trade with sellers.
Model
Models are used to predict the future or answer questions about how a change affects various sectors of the economy. In short, models explain the relationship between two or more economic variables. Models explain how individuals and firms allocate their resources and how market prices are determined.
Theoretical Economics
is the development and use of models to test hypothesis
Economic hypothesis
predictions about cause and effect
Positive statement
Is a statement/hypothesis that is testable about cause and effect. “Positive” tells us that we can test the truth of the statement. Positive statements tell us what WILL happen based on reality.
Normative statements
These are value judgments that tell us what SHOULD happen. A normative conclusion can be drawn without first conducting a positive analysis. A positive analysis should be conducted first to enable a better informed normative decision
How are models used
models are used by individuals, governments and firms to make decisions.
Quantity demanded
Quantity demanded is the amount of a good a consumer is willing to buy at a given price, holding other factors beyond price constant.
Demand Factors
Factors that influence consumers demand of a good or service include prices, taste, information, income, prices of other goods, and government actions
Demand curve
The demand curve shows the quantity demanded at each possible price, holding constant the other factors that may impact demand.
Law of Demand
Law of demand finds that consumers demand more of a good the lower its price. This is an empirical finding
and shows that demand curves slope downward.
Empirical Economics
Is the application of models to see what they result in. In other words, the testing of models on the real world
Movement ALONG the demand/supply curve
The changes in quantity demanded/supplied in response to changes in price.
Shift OF a demand/supply curve
The changes when a factor other than price changes.
Demand function
The demand function shows the effect of all relevant factors on the quantity demanded.
The slope of a demand curve
Delta P / Delta Q
Summing demand curves
As long as all consumers face the same price, we can add 2 or more demands together to get the total quantity demanded.
Supply Factors
costs of production and government rules and regulations.
Quantity supplied
the amount of a good that firms want to sell at a given price, holding other factors constant.
Supply Curve
is the graphical representation of quantity supplied at each possible price holding constant other factors.
Law of Supply
Doesn’t exists - supply curves generally slope up, but they can be vertical, horizontal, upward or downward sloping.
Supply function
A mathematical explanation of the relationship between quantity supplied and price and other factors
Equilibrium
When no one wants to change their behavior.
Equilibrium price
A price that allows all consumers to purchase as much as they want and all suppliers to sell as much as they want.
Equilibrium quantity
The quantity that is bought/sold at the equilibrium price
Excess demand
happens when a price is below the equilibrium price and the quantity demanded by consumers is more than the quantity suppliers are willing to sell at that price
Excess supply
happens when the price is above the equilibrium price and suppliers want to sell more at a higher price, but consumers are not willing to pay that high of a price and their demand is lower resulting in excess supply. Suppliers will lower their price to avoid having their product go bad and clear the market
Market clearing
is when there isn’t anything left to sell or buy because market equilibrium was found
Quota
A limit the government sets on the quantity of a foreign-produced good that may be imported
Policies that shift supply curves
Licensing and quotas are two examples of policies that affect a market equilibrium.
Price ceiling
when the government sets the maximum price of a good/service.
Price floor
when the government sets the minimum price of a good/service.
Non-binding price ceiling
There is no effect if the equilibrium price is below the price ceiling (non-binding)
Binding price ceiling
means that the market would adjust to a higher price but the price ceiling is preventing the natural adjustment resulting in a shortage. Resulting in an equilibrium with a shortage
Shortage
When the price is below the equilibrium price, buyers would be delighted to buy cheap gas, but many sellers are going to close shop creating a shortage.
Elasticity
The percentage change in a variable given the percentage change in another variable
Price elasticity of demand
is the percentage change in quantity demanded divided by percentage change in price. Represented by -b(P/Q) and resulting in a pure number without a unit of measure. elasticity of demand is always negative. Describes a movement along the demand curve as a result of a price change
Linear quantity demand function
Q = a-bP
where a is the quantity demanded when price is zero
-b is the inverse of the slope (deltaQ/deltaP)
What is the elasticity function for a linear demand curve?
epsilon=(deltaQ/Q) / (deltaP/P) or (deltaQ/deltaP)(P/Q)
Perfectly inelastic demand
Happens when there is no substitutes. Where elasticity of demand is 0. it’s a vertical demand curve
Inelastic demand
When demand elasticity is between 0 and -1. 0>epsilon>-1 It falls between the midpoint of the demand curve and the lower end where Q=a. In other words, where the demand curve is inelastic, a 1% change in price will have less than 1% decrease in quantity demanded.
Unitary elasticity demand
is at the midpoint of the linear demand curve where a 1% increase in price causes a 1% fall in quantity.
Elastic demand
At prices above the midpoint of the demand curve, the elasticity of demand is less than -1. epsilon
Perfectly elastic demand
Perfect substitutes. When people are super sensitive to price changes. Charge more, you won’t sell anything. Charge less, they’ll buy you out. Where the demand curve hits the price axis and when epsilon approaches negative infinity. it’s a horizontal demand curve
Revenue
is P*Q or the area beneath the demand at a certain price and quantity
Short-run elasticity
the shape of a demand curve depends on the relevant time period. A short run’s duration depends on how long it takes consumers or firms to adjust for. It’s length is impacted by ease of substitution and storage opportunities
What determines the degree a shock shifts the supply curve and affects the equilibrium prices and quantity
The shape of the demand curve
What determines the degree a shock shifts the demand curve and affects the equilibrium?
The shape of the supply curve
Income elasticity
is the percentage change in the quantity demanded in response to a given percentage change in income. (deltaQ / Q) / (deltaY / Y) = (deltaQ/deltaY)(Y/Q)
Cross-price elasticity
the percentage change in the quantity demanded in response to a given percentage change in the price of another good. (deltaQ/Q) / (deltaPother/Pother) = (deltaQ/deltaPother) (Pother/Q)
What is price elasticity of supply
represented by eta, it is the percentage change in the quantity supplied in response to a given percentage change in price. Describes a movement along the supply curve as price changes.
What is the linear supply curve function
Q = g + hp where g and h are constants h = deltaQ / delta P
What is the elasticity of supply for a linear supply function?
eta = (deltaQ/deltaP)(P/Q) or h(P/Q) where h is a constant
ad valorem tax
for every dollar a consumer spends, the government keeps a portion.
what is a specific tax
a specific dollar amount is collected per unit of output
Price takers
is when the sellers in a market can’t influence the price because there are many sellers and if any tried to charge a higher price they will not attract any buyers
Does a price change tell us enough to determine the cause?
No, a drop in demand or an increase in supply can lead to a price drop.
Excess supply of labor
is unemployment
As a demand curve gets more elastic, what happens to tax burden?
It is borne by producers because the consumer has the negotiating power
Outward shift of a demand curve is caused by
the increase of the price of a substitute
What do you need to estimate the elasticity of demand
A supply curve shifter that only works on that market
What do you need to estamate the elasticity of supply?
A demand curve shifter that only works on that market
consumer theory
the subject concerned with what lies behind the demand curve
producer theory
the subject concerned with what is behind the supply curve
three components of consumer theory
preferences, utility and budget constraint
formula to find the linear equation between two points
Qd -Qd1=(Qd2-Qd1)/(P2-P1)* (P-P1)
preference assumptions
- completeness in how you feel (prefer one over the other or are indifferent, but you always know)
- transitivity if a>b and b>c then a>c
- non-satiation - you’ll always want more
indifference curves are
preference maps of every available bundles - help us understand how individuals make choices. you are indifferent between any points on a given indifference curve.
4 properties of indifference curves
1. further from origin is better 2. downward sloping 3. never cross 4. one indifference curve through any given bundle
utility function
helps us rank options
marginal utility
The derivative of the utility function with respect to the quantity of the good.
Marginal rate of substitution
The rate you desired to trade good x for good y. It’s about your tastes. How you feel about trading off the next pizza for the next movie. How much of x am i willing to give up for y as we move along an indifference curve MUx/MUy
Budget constraint
Y = ApA+BpB
Where Y is your income
Opportunity cost
The value of the next best foregone alternative
Marginal rate of transformation
The rate the market allows you to trade one good for another. It’s about the market conditions.
MRT = -Px/Py the magnitude of the slope of the budget constraint
Highest indifference curve you can achieve
where the slope of the indifference curve equals the slope of the budget constraint
When plotting budget constraints or indifference curves, what measures do the axes represent
They represent quantities of good A and B
When solving for a constrained maximization problem graphically, we are solving for…
a point of tangency
MRS = MRT
you set the rate you’d like to trade a for b and set that equal to the rate the market will let you trade a for b. It is the benefit cost calculus. Where MRS is the marginal benefit and MRT is the marginal cost.
MRT = -Pa/Pb The ratio of prices of a and b which = MRS = -MUa/MUb
or you can rewrite it as MUa/Pa = MUb/Pb
inferior good
a good that decreases in demand when consumer income increases
normal good
a good that increases in demand when come income increases
necessity good
a normal good that increases less than proportionately in demand when consumer income rises
luxury good
a normal good that increases more than proportionately in demand than when consumer income rises
substitution effect
how much less of a good do you want holding your utility constant because the price ratio changed
income effect
holding prices constant how much less of the good do you want because you’re poorer
giffen
a good where the price goes up and you want more of it. only happens if its an inferior good with an income effect that is larger than the substitution effect.
deriving labor supply
slope = -wage. price you’re giving up to sit around
Short run
Some inputs are fixed (capital) and some are variable (labor)
Long run
All inputs are variable
SR Production function
q = f(L,Kbar)
Marginal Product of Labor
holding Kbar constant, MPL = change in q/change in L
q2-q1)/(L2-L1
MRTS Marginal rate of technical subsitution
The slope of isoquants for production functions
MRTS Marginal rate of technical subsitution
The slope of isoquants for production functions. MPL/MPK
