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1

Law of Demand

price and quantity are inversely related
downward sloping curve
changes in price & quantity cause movement along the curve

2

Factors other than price

changes in determinants of demand cause the entire demand curve to shift left or right

3

Determinants of demand

consumer income
consumer taste & preference
Prices of related goods
consumer expectations
number of consumers
since demand curve is based on customer changes that affect consumer behavior affect the demand curve

4

Consumer incomes

wealthier population shifts curve to right
normal goods- positively related to income (shift right as income rise)
inferiror goods - demand is negatively related to income (shift to left as income rises)

5

consumer taste & preference

popular products produce shifts to right

6

Price of related goods

price increase in A increases demand for B (substitutes)
price increase in A results in decrease in demand for B (complements)

7

Consumer expectations

expectations of events (hurricanes) increased demand of items shifts to right

8

Supply

schedule of goods producers willing to offer @ various prices
positive (upward sloping)

9

Law of supply

price positively related to quantity supplied

10

Determinants of supply

Costs of inputs
Change in efficiency of the production process (newer tech)
expectations about price changes
Taxes & subsidies

11

Costs of inputs

increase of inputs (wages, RM) shift curve to left
decreases shift curve to right

12

Change in efficiency

improves production process shift supply curve to right

13

Expectations about price changes

expect products price to decrease, increase supply to sell as much as possible and decrease production when prices fall

curve shifts to right

14

Taxes & Subsidies

increase in taxes or decrease in subsidies shift curve to left
decrease in taxes or increase in subsidies shift curve to right

15

Surplus

market price exceeds equilibrium price
quantity > demand
competition to eliminate excess causes price cuts & lower production
price lowers, more buyers enter market. price settles
govt intervention can create

16

Shortage

market price lower than equilibrium
consumers compete for scare goods, prices increase
prices rise, new suppliers enter, price settle, shortage eliminates
govt intervention- price ceiling (price set low allows high demand w/o many suppliers @ price)

17

Elasticity of Demand

Sensitivity of quantity demanded of product to a change in its price

18

Point Method

price elasticity of demand for a specific change
Change in Q/Change in P

19

Midpoint Method

change in Q= (Q1-Q2)/(Q1+Q2)
change in P= (P1-P2)/(P1+P2)
E(D)=change in Q/change in P

20

relatively elastic

E(D) or E(S)>1
change in Q> change in P

21

unitary elastic

E(D) or E(S)=1
change in Q=change in P

22

relatively inelastic

E(D) or E(S)

23

perfectly elastic

infinite demand or supply
horizontal line (price constant, quant changes)
pure competition lots of firms means 1 firms can't impact market

24

perfectly inelastic

E(D)=0
vertical line
need for product means pay any price
# consumers limited, ant desired is constant

25

substitutes affect on Price elasticity

more subs, demand more elastic, small price increase cause decrease in quant demanded

fewer subs, demand becomes more inelastic

26

Price Ceiling

price set @ less than market equilibrium, creates shortage b/c market won't meet artificial price

27

Price floor

price set above equilibrium, surplus created b/c artificial price generates more than market will buy

28

Explicit vs implicit costs

explicit- cash pmts
implicit- opportunity costs (economic/normal/total costs)

29

Short run vs long run

short- time pd so brief cannot vary its fixed costs
long- pd long enough that all inputs, including FC, can be varied

30

Marginal analysis
total vs marginal product

marginal analysis- econ decisions based on projections on various levels of resource consumption & output production
total- entire production of good/service over pd of time
marginal-addtl output by adding 1 extra unit of input