Unit 2 Flashcards
What is Demand?
Demand is the different quantities of goods
that consumers are willing and able to buy at
different prices
What is the Law of Demand?
There is an INVERSE relationship between
price and quantity demanded
As Price Falls…
…Quantity Demanded Rises
As Price Rises…
…Quantity Demanded Falls
5 shifters in demand?
5 Shifters (Determinates) of Demand:
1.Tastes and Preferences
2.Number of Consumers
3.Price of Related Goods
4.Income
5.Future Expectations
Changes in PRICE don’t shift the curve. It
only causes movement along the curve.
Why does the Law of Demand occur?
The law of demand is the result of three
separate behavior patterns that overlap:
1.The Substitution effect
2.The Income effect
3.The Law of Diminishing Marginal Utility
The Substitution Effect
If the price goes up for a product, consumer buy
less of that product and more of another
substitute product (and vice versa)
Income Effect
If the price goes down for a product, the
purchasing power increases for consumers -
allowing them to purchase more
Substitutes
Substitutes are goods used in place of one
another
If the price of one increases, the demand for the
other will increase (or vice versa)
Complements
Complements are two goods that are bought
and used together.
If the price of one increase, the demand for the
other will fall. (or vice versa)
What is supply?
What is supply?
Supply is the different quantities of a good that sellers
are willing and able to sell (produce) at different prices
What is the Law of Supply?
There is a DIRECT (or positive) relationship between
price and quantity supplied
As price increases, the quantity producers make
increases
As price falls, the quantity producers make falls
6 Shifters (Determinants) of Supply
- Prices/Availability of inputs (resources)
- Number of Sellers
- Technology
- Government Action: Taxes & Subsidies
- Opportunity Cost of Alternative
Production - Expectations of Future Profit
Changes in PRICE don’t shift the curve. It only
causes movement along the curve.
Four single shifts
- Demand: rises, then Price: rises, and Quantity: Increases
- Demand: decreases, then Price: decreases, and Quantity: decreases
- Supply:rises, then Price: falls, and Quantity: rises
- Supply: decreases, then Price: rises, and Quantity: decreases
Consumer Surplus
Consumer Surplus is the difference
between what you are willing to pay
and what you actually pay.
CS = Buyer’s Maximum – Price
Producer’s Surplus
Producer’s Surplus is the difference
between the price the seller received
and how much they were willing to sell
it for.
PS = Price – Seller’s Minimum
Elasticity
Elasticity shows how sensitive quantity is
to a change in price
Elasticity of Demand-
Elasticity of Demand-
* Measurement of CONSUMERS
responsiveness to a change in price.
Inelastic Demand
INelastic = Quantity is
INsensitive to a change in price
General Characteristics
of INelastic Goods (5)
General Characteristics
of INelastic Goods:
!. Few Substitutes
2. Necessities
3. Small portion of
income
4.Required now, rather
than later
5. Elasticity coefficient
less than 1
General Characteristics
of Elastic Goods: (5)
General Characteristics
of Elastic Goods:
1. Many Substitutes
2. Luxuries
3. Large portion of
income
4. Plenty of time to
decide
5. Elasticity coefficient
greater than 1
Total Expenditures Test
Price X Quantity = Total Expenditures
Uses elasticity to show how changes in price will
affect total revenue
Elastic demand vs TR
Elastic Demand-
* Price increase causes TR to decrease
* Price decrease causes TR to increase
Inelastic Demand vs TR
Inelastic Demand
* Price increase causes TR to increase
* Price decrease causes TR to decrease
Unit Elastic vs TR
Price changes and TR remains unchanged
Inelastic coefiecient
Elasticity of demand LESS THAN 1
Elastic coefiecient
Elasticity of demand MORE THAN 1
Unitary coefficient
Elasticity of demand EQUALS 1
Perfectly elastic coefficient
Elasticity of demand EQUALS 0
Perfectly Inelastic coefficient
Elasticity of demand EQUALS INFINITY
Cross-Price elasticity
Cross-Price elasticity shows how sensitive a product is
to a change in price of another good
* It shows if two goods are substitutes or complements
coefficient is negative= complements
coefficient is positive= substitutes
Normal Goods
Normal Goods
* As income increases, demand increases
* As income falls, demand falls
Inferior Goods
Inferior Goods
* As income increases, demand falls
* As income falls, demand increases
Excise Tax
Excise Tax = A per unit tax on producers
