Test 1 Flashcards
Factors affecting Demand (other than price)
- Taste and preferences
- Price of related goods (substitutes & complements)
- Income
- Expected future price
- Population or demographics
Change in Demand vs. Change in Quantity Demanded
Change in D: SHIFT of curve
Change in QD: MOVEMENT along curve
Factors affecting Supply (other than price)
- Cost of inputs/ production
- Better technology
- Price of related goods in production
- Natural factors
- Future expected prices
- Number of sellers (competition)
Market Equilibrium
When QD = QS
Surplus
When QS > QD
Shortage
When QD > QS
Combined effect on Eq P
D ↑ S ↑: depends
D ↑ S ↓: Eq P ↑
D ↓ S ↑: Eq P ↓
D ↓ S ↓: depends
Combined Effect on Eq Q
D ↑ S ↑: Eq Q ↑
D ↑ S ↓: depends
D ↓ S ↑: depends
D ↓ S ↓: Eq Q ↓
Consumer surplus
difference between highest price a consumer is willing to pay - the actual market price
Area of consumer surplus
Area below D curve and above market price
Producer surplus
difference between the actual market price - reservation price
Area of producer surplus
Area above S curve and below market price
Price floor
minimum price sellers may receive
- minimum wage
Why impose minimum wage?
Equilibrium price is too low
Effects of minimum wage
- creates surplus of unemployment
- supply decreases
- prices increase (inflation)
Price ceiling
maximum price sellers may charge
- rent control
Why impose rent control?
Equilibrium price is too high
Effects of rent control
Short term: 1. creates shortage of apartments 2. quality of service decreases 3. find other ways to increase income Long term: 1. sell apartment buildings and invest elsewhere 2. long-run shortage
Tax incidence
the actual division of the burden of a tax between buyers and sellers in a market
Price elasticity of demand
% change in QD / % change in P
(how D responds to a change in P)
- always negative, but we use absolute values
Midpoint formula
to ensure we have only 1 value of the P elasticity of D between the same 2 points on a D curve
(Q2 - Q1/ (Q2 + Q1) / 2) / (P2 - P1/ (P2 + P1) / 2)
Perfectly inelastic demand
ed = 0
vertical line
Relatively less elastic demand
ed < 1
steep line
Unitary elastic demand
ed = 1
Relatively more elastic demand
ed > 1
not steep line
Perfectly elastic demand
ed = infinity
horizontal line
Total revenue
the amount of funds a seller receives from selling a goof or service
TR = (price per unit) x (# of units sold)
TR when D is inelastic
P and TR move in the same direction
TR when D is elastic
P and TR move inversely
