WEEK 2 Flashcards
What is comparative statics
Comparison of 2 economic outcomes before and after a shock
What does comparative mean in comparative statics
Compares the 2 equilibrium’s before and after
What does static mean in comparative statics
Doesn’t study the motion towards equilibrium or the change itself
What is changes in demand
A change in quantity demand is a movement along a curve
What does a change in demand refer to
Refers to a new curve
Is the changes in demand the same as changes in supply
Yes
What are the factors that shift demand
Substitute goods
Complementary goods
Changes in income
Change in preferences
Change in population
Change in expectation of future prices
How does substitute goods shift demand
If price of a sub increases demand increases
How does complementary goods shift demand
If price of complementary decreases demand increases
How does change in income shift demand
For a normal good an increase in demand
For an inferior good leads to decrease in demand
How does change in preference shift demand
When something is found to be bad (fags) decrease in demand
How does population shift demand
More people more demand
When predicting the market an increase in demand
Increased price and quantity
When predicting the market an decrease in demand
Decreases in equilibrium price and quantity
What are the factors that shift supply
Any changes that affect the cost of production
Example of factors shifting supply
An increase in labour prices - Decreased supply
When predicting the market an increase in supply
Will lead to a decrease in equilibrium prices and increase in quantity
When predicting the market a decrease in supply
lead to an increase in equilibrium price and decrease in quantity
What is price elasticity
A measure of how much quantity demanded is effected by changes in prices
Whats the formula for elasticity
%change in quantity demanded / %change in price - Always positive
How to find %change in price
new price - old price / 100
How to find %change in demand
new demand - new price / 100
If E > 1
Demand is elastic - customers responsive over price changes
If E < 1
Demand is inelastic - Consumers unresponsive over price changes
If E = 1
Demand is unit elastic - quantity changes the same as prices
When is demand perfectly elastic and inelastic
elasticity = infinity
inelastic = 0
What does perfectly elastic mean
Even slightest increase in price leads to switches to subs
What does perfectly inelastic mean
Consumers have no substitutes
In graphs how is perfectly inelastic and elastic shown
elastic is a straight line across inelastic is straight line up
What is the largest determinant of E
Availability of subs
what is arc elasticity
The price elasticity between 2 points on the demand curve
What is price point elasticity
The price elasticity at a certain point
What is the price point elasticity formula at one point
1/gradient (always positive) x p/q
if p=20-4q and a=3,8 whats the elasticity
1/4 x 8/3 = 2/3
What does the price point elasticity number mean - with E=2/3
If there is an increase of 1% in price it would lead to a 2/3% decrease in demand
When price and quantity is the same the curve with what will have the higher demand
Smaller gradient
When gradient is the same
Elasticity increases as we move along a demand curve as p/q declines
How to find total revenue
P x Q
If demand is elastic and a small price increases then
It will lead to a big drop in quantity - TR decrease
If demand is inelastic a large price increase will
Decrease demand a little - TR increase
Determinants of E
Availability of subs
time to adjust
Share of budget
Addiction
Why is time to adjust a determinant of E
short term consumers find it hard to change behaviour - long term doesnt
Why is share of budget a determinant of E
What % of your budget is spent on a good
Why is adiction a determinant of E
addictive goods tend to be inelastic