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
