Unit 2 micro

• Demand : the lower the price, the more the demand, represents marginal benefit we receive from buying a good
• Consumers who are willing to purchase at any price levels showing quantity -> Demand Schedule
• Law of Demand : inverse relationship between price and demand

  • Price goes up, quantity demand goes down
  • Price goes down, quantity demand goes up
• Supply : amount of product consumers willing to buy, represents marginal cost of production -> firms wont produce it if they can’t make enough money
• Law of Supply : direct relationship between quantity produced and price (price increases, quantity supplied increase)
• Ceteris Paribas : a firm will produce and offer more goods for sale at a higher price than a lower price
• Moving along supply curve -> change in QTY supplied
• we receive marginal benefit from buying goods and services
• When price changes -> provides an economic incentive that motivates people to either buy or not buy the good
• Qd < Qs : excess supply surplus
• Qd > Qs or Qs < Qd : excess demand shortage
• Determinants of demand : income, price, tastes and preferences
• Related goods involve Substitutes and complements
• Substitutes :

  • Price (coke) goes up, demand(pepsi) goes up
  • Price(coke) goes down, demand(pepsi) goes down
• Complements:

  • Price(chips) goes up, demand(cheetos) goes down
  • Price(chips) goes down, demand (cheetos) goes up
• Income involve normal goods and inferior goods
• normal goods :

  • income goes up, demand goes up
  • income goes down, demand goes down
• inferior goods :

  • income goes up, demand goes down
  • income goes down, demand goes up
• Expectation of Price : future prices change current demand
• • Determinates of supply : ROTTEN :
  • R - resources / input prices ( price goes up , supply goes down)
  • O - other goods
  • T - technology
  • T - taxes / subsides
  • E - expectation of price
  • N - number of sellers
• price control , price ceiling , price floor :

  • Price control : when the government sets the price for a good or service
  • Price ceiling : sets a maximum price for a good
  • Price floor: minimum price for a good
• Surplus : price is above equilibrium, encouraging sellers to lower prices to eliminate surplus
• Shortage : at any price below equilibrium, leads to the price of the good increasing
• Price Elasticity of Demand : how responsive consumers are to a price change for a good or service
• when consumers are highly sensitive to a price change , they are elastic towards the good
• when consumers are not sensitive to a price change , they are inelastic towards the good
• If Ed > 1 , it is elastic
• If Ed < 1 , it is inelastic
• If Ed = 1 , it is unit elastic
• Total Revenue : total revenue the sellers receive from the sale of a product
• Price(P) * Quantity(Q) = Total Revenue (TR)
• If TR changes in the opposite direction from the price, it is elastic
• If TR changes in the same direction from price , it is inelastic
• If TR doesn't change when price changes, it is unit elastic
• Determinants of Price Elasticity of Demand :

  • Substitutability - more substitutes, more elastic demand
  • Proportion of income - price relative to income
  • Luxurious vs Necessities - Luxurious are more elastic , necessities are inelastic
  • Time - more elastic in the long run
• Price Elasticity of Supply : how easily and quickly producers can shift resources between alternative uses
• Momentary Supply : perfectly inelastic in most cases
• Short Run and Long Run

  • Short run - relatively inelastic
  • Long run - relatively elastic
• Durable goods - appliances , more elastic because they are stored safely
• Nondurable goods - goods like food , more inelastic