week2: demand and supply Flashcards
what is a benefit? what is utility?
benef= gains that can be expressed in financial terms
utility= satisfaction
-> hard/impossible to measure
what is the Marginal utility/Marginal benefit:
extra benefit of consuming one extra unit of a product
the more you consume a good, the lower is the marginal utility
ex: if you buy 2 coffee, the marginal benefit of the first coffee (it will bring you a lot of joy) but the second one will bring you less cse already used to it
what is the Law or Principle of Diminishing Marginal Utility / Benefits
utility of one coffee is decrease by drinking another: the more you consume, the less you will have extra benef)
what is a field of indifference curves, and what is indifference curves
represents a set of different indifference curves on a graph (bcs there are a lot of them)
indifference curve shows combinations of two goods that provide the same level of utility (satisfaction) to a consumer.
graph interpretation of indifference curves
-If it is further from the origin: represent higher utility (since consumers always prefer more of a good)
-> higher utility
-If it is closer to the origin: represent lower utility (these curves indicate lower levels of consumption and, therefore, less overall satisfaction).
-> lower utility
why is the indifference curve not straight
bcs of the economic principle of Diminishing Marginal Rate of Substitution (MRS)
-> The MRS measures how much of one good a consumer is willing to give up to obtain an extra unit of another good while maintaining the same satisfaction level.
At first, if you have a lot of one good (say, bananas) and very little of another (say, apples), you might be willing to give up many bananas for just one apple. But as you get more apples and fewer bananas, you value each remaining banana more, and you are willing to give up fewer bananas for additional apples.
give an example of indifference curve with pastries and coffee
Imagine a consumer choosing between coffee and pastries.
An indifference curve U1 (closer to the origin) might represent lower satisfaction (e.g., 1 coffee & 1 pastry).
Another indifference curve U2 (further from the origin) represents a higher level of utility (e.g., 2 coffees & 2 pastries).
Moving to a higher curve requires more of one or both goods, increasing total satisfaction.
budget line
depict what you can afford to buy (the income)
equation: Y=p1.q1+p2.q2 (Y=income; p=price; q=quantity)
slope of budget line= -p1/p2
EX: comics=5£ and pizza=10£ and 160£ income
-equation: 160=10q2+ 5q1
slope: -5/10=-0,5 so opportunity cost of a pizza is 2 comics, and opportunity cost of a comic is half a pizza
what is the best affordable consumption point?
the optimal combination of goods/services a consumer can purchase given their budget constraint while maximizing their utility
-> on the curve, it is a POINT: where the highest possible indifference curve is tangent to the budget line (so when budget line croses the highest possible (given the income) indifference curve)
-> mathematically, when marginal rate of substitution (MRS) equals the price ratio: MRS=p1/p2
with: MRS measures the rate at which a consumer is willing to trade one good for another while maintaining the same level of utility (satisfaction).
what is the basic assumption on the income
that everything will be spent
what is the demand curve and what principle does it follows?
follows the law of demand, which states that, ceteris paribus (all else being equal), as the price of a good decreases, the quantity demanded increases, and as the price increases, the quantity demanded decreases.
Substitution Effect – When the price of a good rises, consumers may switch to cheaper alternatives, reducing demand for the original good.
Income Effect – As the price of a good decreases, consumers’ purchasing power increases, allowing them to buy more.
Diminishing Marginal Utility – As consumers consume more of a good, the additional satisfaction (utility) they gain from each extra unit decreases, making them less willing to pay higher prices.
what is the Horizontal addition
method used to derive the market demand curve by summing the individual demand curves of all consumers at each price level.
The market demand curve is found by horizontally summing these individual demand curves, meaning we add the quantities (not the prices) at each price level.
what is the quantity demanded depending on? how does it shift?
*The price of a product (a change along the
Demand Curve)
-> the curves dosen’t shift, only the point on the demand line, depending on the price
* 2. The prices of related products (depend on the relative price of substitutes + price of its complements)
* 3. Income
* 4. Preferences
* 5. Population (more consumers means more demand)
* 6. Expected future prices (if you know price of a good will rise, you buy more now before it rises)
* 7. Expected future income
-> the demand line shifts as a whole
basic assumption onthe demand curve (law of demand)
the higher is the price, the lowest is the quantity
what is a quantity?
the number of a good or service that consumers are willing to buy at a specific price
-> the opportunity cost of a good (ex: opportunity cost of a café is the quantity of chocolate forgone)
what are the different effects if prices decrease?
Substitution effect: people buy more of a
product because the price has fallen compared to the prices of other products
Income effect: people buy more of a product because of the increase in real income as a result of the average fall in prices: can buy more with the same amount of the income
precise what happend with different types of good if prices decrease
normal goods: good for which demand increases as income increases (ceteris paribus). This means that when people earn more money, they buy more of these goods ex clothes…
-> positive substitution and income effect
inferior goods: good for which demand decreases as income increases. When people have more money, they substitute these goods for better alternatives ex: if income increase, use less of train and more you car
-> negative income effect (ppl buy less) but still positive substitution effect
what is the price elasticity of demand?
Measures the effect of price changes on the
quantity demanded (Ep): percentage change in quantity demanded divided by percentage change in price (always negative)
(delta q/q average * 100%) %delta q
Ep = —————————————-= ———-
(delta p/paverage * 100%) %delta p
how does Ep changes?
straight demand line has both elastic and inelastic parts: price elasticity changes along the Demand line
.perfectly elastic demand: Ep is infinite -> Even a tiny increase in price causes demand to drop to zero. Consumers will only buy at one fixed price.
EX: If one farmer raises the price even slightly, no one will buy from them because buyers can get the exact same product elsewhere at the market price.
.elastic demand Ep>1 -> A small change in price leads to a larger change in quantity demanded
EX: luxury goods
.unit-elastic demand Ep=1 -> A percentage change in price leads to an equal percentage change in quantity demanded
EX: if the price of a movie ticket increases by 10%, and the number of tickets sold decreases by exactly 10%
.inelastic demand 0<Ep<1 -> change in price leads to a smaller change in quantity demanded. Consumers are less sensitive to price changes.
EX: essential goods, like salt, gasoline…
what is the income elasticity of demand
income elasticity of demand measures how much the quantity demanded of a good responds to a change in consumer income.
-> the percentage change in quantity
divided by the percentage change in income: Eincome = (q/q) / (y/y)
* Luxuries (a good for which demand increases more than proportionally as income rises): Eincome is larger than 1
* Necessities: Eincome is positive but near 0
* Inferior products: Eincome is less than 0
give the equation of total cost, total variable cost, average total cost, average variable cost, average fixed cost, marginal cost
*Total Costs: TC = TFC + TVC
* Total Variable Costs: TVC = w.l (wage x labour)
* Average Total Costs: ATC = TC/q = AVC + AFC
* Average Variable Costs: AVC = TVC/q = w.l/q
* Average Fixed Costs: AFC = TFC/q
* Marginal Costs: MC = ∆TC/∆q = ∆TVC/∆q
what is a total cost?
cost of all the factors of production a firm uses; can be:
*fixed (cost of the firm’s fixed factors (machines…))
*variable (ex raw materials used in production)
what is marginal cost? + diff with opportunity cost
the change in total cost resulting from a one-unit increase in output.
MC= change in total cost (∆TC) / change in output (∆Q)= ΔQ/ΔTC
=/ opportunity cost (This refers to the value of the next best alternative that is foregone when making a decision.
It represents the benefits lost when choosing one option over another)
what is short run
a period in which at least one factor of production (e.g., capital, land) is fixed, while other inputs (like labor) can be adjusted to increase or decrease output.
-> The only way to increase output is by adding more of a variable input, such as labor.
ex: A restaurant’s kitchen size and equipment are fixed in the short run, but it can hire more chefs or buy more ingredients to increase production.
