Topics in Demand and Supply Analysis Flashcards
Factors that impact consumer demand:
- own price
- price of substitutes
- price of complement goods
- consumer incomes
- individual tastes and preferences
Quantity demand equation:
= Qd = intercept - own price + income - related good
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:
- plug in i and Pt to equation
Qd = 10 - 0.5P + 89.99999 Qd = 100 - 0.5P
What is the inverse demand function and what is it for Qd = 100 - 0.5P
- the inverse demand function is the simple demand function in terms of price
Qd = 100 - 0.5P =
P = 200 - 2Q after using simple algerbra
Demand curve x-axis and y-axis
Qd = 100 - 0.5P = P = 200 - 2Q
- 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
Movement along the demand curve:
- when a good’s own price changes, the quantity demanded changes, all else equal
Shifts in the demand curve:
- 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
Own-price elasticity of demand:
P=$60, Qd=70
Own-price elasticity of demand = -0.4 means what:
- when P=$60, a 1% increase in price results in a 0.4% decrease in the quantity demanded
Inelastic, unit elastic, and Elastic:
- 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
If there are no close substitutes, the demand is:
- is less elastic
- ie gas
If there are close substitutes for a good and price of the good increase, then:
- Qd for the good will decrease
- this implys the demand is highly elastic
highly elastic ex: expensive items
Elastic demand:
when demand is elastic, a 1% decrease in price causes …
- causes quantity demanded to increase by more than 1% and total expenditure increases
Inelastic demand:
when demand is inelastic, a 1% decrease in price causes …
- causes quantity demanded to increase by less than 1% and total expenditure decreases
Income Elasticity of Demand:
what it is and formula overview
- 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)
Normal good:
- income elasticity is positive (if coef of i in dF is pos)
- if income increases, then Qd increases
Inferior good:
- income elasticity is negative
- if income increases, Qd decreases
Cross-price elasticity of demand:
what it is and formula overview
- 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)
Substitutes:
- 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
Substitute goods have a ________ cross-price elasticity of demand
- the cross-price elasticity of demand is positive for substitute goods
If cross-price elasticity of demand of A against the price of B is 1.83, then…
- these goods are substitutes since its a positive number (and its high)
- as the price of B increases, the Qd of A will increase
Complement goods are
- 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
If the cross-price elasticity of demand of A against the price of B is -0.5, then…
- 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
if price decreases, the effects between a normal good and inferior good are…
Substitution effect Income effect Normal good
Inferior good
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
Griffen good
- extreme case of an inferior good
- a decrease in price causes a decreas in Qd
- A POSITIVLY SLOPED DEMAND CURVE
Vevlen goods
- 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
Economic profit
definition and formulas
- 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
Marginal revenue
- the change in TR / the change in quantity
Marginal revenue under perfect competition:
MR = AVG Revenue = Price
the demand curve is horizontal (perfectly elastic)
Marginal revenue under imperfect competition
- 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)
Marginal cost
- the incremental cost of producing one more unit
- MC = delta TC / delta total Q
Short-run marginal cost v long-run MC
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
Profit is maximized where:
marginal revenue = marginal cost
Total revenue under perfect competition
- 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
Total revenue under imperfect competition
- 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
Is profit maximized when ATC is minimized?
- no, because ATC could be where Q=0, then there is no profit
A firm breaks even when:
- TR = TC
- price (AR) = ATC
- at this point, economic profit is zero
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
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
Price elasticity of Demand formula
= delta Q / delta P
Any value above 1.0 in absolute terms indicates high elasticity.
