Lecture 2 Flashcards
(20 cards)
What does the downward sloping demand curve represent?
A change in price results in movement along the curve or shifts due to external factors
Example: From (Q0, p0) to (Q1, p1)
What does the upward sloping supply curve indicate?
A change in price results in movement along the curve or shifts due to external factors
Example: From (Q0, p0) to (Q1, p1)
Define partial equilibrium.
Equilibrium assessed for a single good rather than the whole market of all goods
What is the equilibrium price?
The price at which the amount consumers are willing to purchase equals the amount firms are willing to supply
What causes a movement to a new equilibrium when demand increases?
An increase in income shifts the demand curve from D0 to D1, leading to excess demand at price p0
What happens when there’s excess supply at price p0?
Demand must increase to meet supply, adjusting the price from p0 to p2
What is the invisible hand in market equilibrium?
The market’s self-regulating nature where consumers’ willingness to pay influences supply
What is price elasticity of demand?
The responsiveness of the quantity demanded to a change in price
How is price elasticity of demand calculated?
ϵD = percentage change in quantity demanded / percentage change in price
What defines an elastic demand?
A change in price causes a proportionately larger change in quantity demanded
ϵD > 1
What characterizes inelastic demand?
A change in price causes a proportionately smaller change in quantity demanded
ϵD ∈ (0, 1)
What is unit elastic demand?
A change in price causes a proportionately equal change in quantity demanded
ϵD = 1
What factors determine the price elasticity of demand?
- Availability of substitute goods
- Proportion of income spent on the good
- Time to adjust to price changes
How does total consumer expenditure (TCE) relate to price elasticity?
TCE = price × quantity; its impact depends on the price elasticity of demand
What happens to total consumer expenditure for an elastic good when price increases?
Total consumer expenditure decreases
What is arc elasticity?
Elasticity measured between two points on a demand curve
How do you calculate arc elasticity?
ϵm,n = (∆Q/Qa) / (∆p/pa) using the average/midpoint formula
What does price elasticity of supply measure?
The responsiveness of the quantity supplied to a change in price
What influences price elasticity of supply?
- Cost of changing production
- Time since price change
Inelastic in the short-run, elastic in the long-run
What topics will be covered next week?
- Income & cross-price elasticity of demand
- The rational consumer
- Marginal utility
- Indifference curves
- Budget constraints
