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Econ > Topics in Demand and Supply Analysis > Flashcards

Topics in Demand and Supply Analysis Flashcards

1
Q

Factors that impact consumer demand:

A
  • own price
  • price of substitutes
  • price of complement goods
  • consumer incomes
  • individual tastes and preferences
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2
Q

Quantity demand equation:

A

= Qd = intercept - own price + income - related good

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3
Q

Qd = 10 - 0.5P + 0.06i - 0.01Pt

Qd of chairs
P = own price
i = income
Pt = price of tables

if i = 1633.33 and Pt = 800, the Qd is written as:

A
  • plug in i and Pt to equation
Qd = 10 - 0.5P + 89.99999
Qd = 100 - 0.5P
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4
Q

What is the inverse demand function and what is it for Qd = 100 - 0.5P

A
  • the inverse demand function is the simple demand function in terms of price

Qd = 100 - 0.5P =

P = 200 - 2Q after using simple algerbra

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5
Q

Demand curve x-axis and y-axis

Qd = 100 - 0.5P = P = 200 - 2Q

A
  • Price on y-axis (vertical)
  • Quantity on x-axis (horizontal)

Y-intercept is 200(P), slope is 2
X-intercept is 100(Q)

The slop of the demand curve is negitive
Elasticity decreases as prices drop; the top left of curve is very elastic and bottom right is very inelastic

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6
Q

Movement along the demand curve:

A
  • when a good’s own price changes, the quantity demanded changes, all else equal
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7
Q

Shifts in the demand curve:

A
  • a change in the value of any other variable will cause the demand curve to shift
  • changes in consumer incomes, prices of substitutes, price of complements
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8
Q

Own-price elasticity of demand:
P=$60, Qd=70

Own-price elasticity of demand = -0.4 means what:

A
  • when P=$60, a 1% increase in price results in a 0.4% decrease in the quantity demanded
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9
Q

Inelastic, unit elastic, and Elastic:

A
  • inelastic: when elasticity is < 1. At low prices, Qd is high
  • unit elastic: when elasticity = 1
  • elastic: when elasticity is > 1

Elasticity decreases as prices drop; the top left of curve is very elastic and bottom right is very inelastic

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10
Q

If there are no close substitutes, the demand is:

A
  • is less elastic

- ie gas

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11
Q

If there are close substitutes for a good and price of the good increase, then:

A
  • Qd for the good will decrease
  • this implys the demand is highly elastic

highly elastic ex: expensive items

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12
Q

Elastic demand:

when demand is elastic, a 1% decrease in price causes …

A
  • causes quantity demanded to increase by more than 1% and total expenditure increases
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13
Q

Inelastic demand:

when demand is inelastic, a 1% decrease in price causes …

A
  • causes quantity demanded to increase by less than 1% and total expenditure decreases
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14
Q

Income Elasticity of Demand:

what it is and formula overview

A
  • it measures how sensitive the Qd is to changes in income
  • if income elasticity of demand were 0.6, then for every 1% increase in income, the Qd will increase by 0.6%

formula
- in the demand F, its the income coefficient * (Income amount given / Qd)

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15
Q

Normal good:

A
  • income elasticity is positive (if coef of i in dF is pos)

- if income increases, then Qd increases

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16
Q

Inferior good:

A
  • income elasticity is negative

- if income increases, Qd decreases

17
Q

Cross-price elasticity of demand:

what it is and formula overview

A
  • measures how sensitive the Qd for a good, X, is to changes in the price of another related good, Y.

formula
- in the demand F, its the related good’s coefficient * (price of related good / Qd)

18
Q

Substitutes:

A
  • two goods are substitutes if one can be used instead of another
  • ie chairs and stools
  • an increase in the price of a substitute good would increase the Qd of the subject good
  • the cross-price elasticity of demand is positive for substitute goods
19
Q

Substitute goods have a ________ cross-price elasticity of demand

A
  • the cross-price elasticity of demand is positive for substitute goods
20
Q

If cross-price elasticity of demand of A against the price of B is 1.83, then…

A
  • these goods are substitutes since its a positive number (and its high)
  • as the price of B increases, the Qd of A will increase
21
Q

Complement goods are

A
  • two goods are complements if they are used together
  • the cross-price elasticity of demand is negative for complement goods
  • ie chairs and tables
  • an increase in the price of a complement good would decrease the Qd of the subject good
22
Q

If the cross-price elasticity of demand of A against the price of B is -0.5, then…

A
  • the goods are complements since it is a negative number

- if the price of B increases, then the Qd of the subject good will decrease

23
Q

if price decreases, the effects between a normal good and inferior good are…

                           Substitution effect               Income effect Normal good

Inferior good

A

Substitution effect Income effect
Normal good buy more buy more; real income increases and increases consumption

Inferior good buy more BUY LESS; real income increases so consumer buys less of
the inferior good

24
Q

Griffen good

A
  • extreme case of an inferior good
  • a decrease in price causes a decreas in Qd
  • A POSITIVLY SLOPED DEMAND CURVE
25
Q

Vevlen goods

A
  • POSITIVE SLOPED DEMAND CURVE
  • but not an inferior good
  • an increase in price increases the value to some consumers, Qd increases
    these are status goods
  • luxury cars
26
Q

Economic profit

definition and formulas

A
  • economic profit is the difference between the total revenue and total economic costs
  • aka abnormal profit

= total revenue - total economic costs

= accounting profit - total implicit opportunity costs

27
Q

Marginal revenue

A
  • the change in TR / the change in quantity
28
Q

Marginal revenue under perfect competition:

A

MR = AVG Revenue = Price

the demand curve is horizontal (perfectly elastic)

29
Q

Marginal revenue under imperfect competition

A
  • demand curve is downward sloping
  • the marginal revenue curve is downward sloping and steeper than demand curve
MR = change in TR / change in Q
MR = P + Q (delta P/delta Q)
30
Q

Marginal cost

A
  • the incremental cost of producing one more unit

- MC = delta TC / delta total Q

31
Q

Short-run marginal cost v long-run MC

A

SR MC: (SMC)
- the cost of producing an additional unit assuming only labor costs vary (all other factors constant)
- is directly related to wage price and inversly related to productivity
- ie: what is the additional labor cost of producing one more unit?
w / MP (labor)

LR MC (LMC):
- the cost of producing one more unit assuming all factors of production are variable
32
Q

Profit is maximized where:

A

marginal revenue = marginal cost

33
Q

Total revenue under perfect competition

A
  • TR = P * Q
  • firm has no pricing power; price taker
  • demand curve is horizontal
  • market price = marginal revenue = average revenue (P=MR=AR)
  • total revenue curve is linear and positively sloped
34
Q

Total revenue under imperfect competition

A
  • a firm has a large market share
  • demand curve is downward sloping (P must drop to sell more)
  • the TR curve increases when MR is positive and demand is elastic
  • the TR curve falls when MR is negative and demand is inelastic
  • maximum TR when MR is zero
35
Q

Is profit maximized when ATC is minimized?

A
  • no, because ATC could be where Q=0, then there is no profit
36
Q

A firm breaks even when:

A
  • TR = TC
  • price (AR) = ATC
  • at this point, economic profit is zero
37
Q 
Shutdown decision:
Situation:                                 Short-run                          Long-run
P > ATC
P = ATC
AVC < P < ATC
P < AVC
TR > TC
TR >= TVC, but TR < TC
TR < TVC
A

Situation: Short-run Long-run
P > ATC econ profit, operate econ profit, operate
P = ATC breakeven, operate breakeven, operate
AVC < P < ATC operate shutdown
P < AVC shutdown shutdown
TR > TC operate operate
TR >= TVC, but TR < TC operate exit industry
TR < TVC shutdown exit industry

38
Q

Price elasticity of Demand formula

A

= delta Q / delta P

Any value above 1.0 in absolute terms indicates high elasticity.

Econ (7 decks)

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