Principles of Economics Ch.3 + Ch.4

Slope of a line

Change in Y / Change in X = ∆𝑦/∆𝑥

Demand curve

- It shows a relationship between quantity and price, in a competitive market - The slope of the demand curve is always negative, because the relationship between P and Q is negative - It is curved, because quantity demanded does not change evenly, as price changes. - To some extent, demand is inelastic, and so people will demand some, even if the price goes quite high - Price elasticity: but elasticity changes at different points on the same curve; it is shown by the slope (steep = inelastic) - Shows the quantity demanded at various prices - The quantity demanded is the quantity that buyers are willing and able to purchase at a particular price - Increase in demand is a rightwards shift, decrease a leftward shift

In-Market Surplus

- This says that for those who are participating in the market: those who at a given equilibrium are buying or selling, that some people in the market are benefitting more than others - Economists argue that markets which maximize utility for all participants, are the best markets - To measure overall surplus, you have to look at the surplus provided both for consumers (demanders) and producers (suppliers)

Consumer Surplus

- Consumer Surplus is when those at the high end of the demand curve receive a ‘bonus’ because they would have bought at a higher price than the equilibrium - Consumer surplus = for Demand Curves (b/c you are talking about demanders = consumers

Change in quantity demanded

A change in quantity demanded occurs when there is a change in the price of the good itself ->> a movement along the demand curve

Change in demand

A change in demand occurs when there is a change in another variable other than the price of the good itself ->> a shift of the demand curve

Causes of a shift in the demand curve

• Changes in the prices of substitute and complementary goods • Changes in income (normal and inferior goods) • changes in tastes • Changes in expectations • Changes in the number of consumers

Supply curve

- A supply curve shows the quantity demanded at various prices - The quantity supplied is the quantity that producers are willing and able to sell at a particular price - Increase in supply causes a rightward shift, decrease a leftward shift

Change in quantity supplied

A change in quantity supplied occurs when there is a change in the price of the good itself ->> a movement along the supply curve

Change in supply

A change in supply occurs when there is a change in another variable other than the price of the good itself ->> a shift of the supply curve

Causes of changes in supply curve

• Changes in input prices • Changes in the prices of supplementary and complementary goods or services • Changes in technology • Changes in expectations • Changes in the number of producers

Competitive market

- market in which there are many buyers and sellers of the same good or service -> key feature: no individual's actions have a noticeable effects on the price (but not true for everything e.g. coca cola) - its behavior is well described by the supply and demand model

Law of demand

A higher price, other things equal, leads people to demand a smaller quantity of that good or service.

Normal goods

Demand for them increases when customer income rises

Inferior goods

Demand decreases when income rises (less desireable)

What happens when the demand curve shifts?

- increase in demand leads to a higher equilibrium price and quantity - decrease in demand leads to a lower equilibirum price and quantity

What happens when the supply curve shifts?

- an increase leads to a lower equilibrium price and higher equilibrium quantity - decrease leads to a higher equilibrium price and lower equilibirum quantity

Surge pricing

Settling the rate higher until everyone who wants sth at the going price can have one (e.g. Uber)

Government Intervention

- price controls: 1. price ceiling (upper limit). 2. price floor (lower limit). - assumption: markets are efficient before invention - can be justigied on basis of equity and social welfare

How price ceilings cause inefficiency (apartment example)

- it reduces the quantitty of apartments rented below the efficient level - it typically leads to inefficient allocation of apartment among would-be renters - it leads to wasted time and effort as people search for apartments - it leads landlords to maintain apartments in inefficiently low quality of condition - gives rise to illegal behavior - reduces the quantity of a good bought and sold below the market equilibrium quantity (missed opportunity) - wasted resources (e.g. time, effort)

Black Markets

- encourage disrespect for the law in general - worsens the positions of honest people - can diminish some of the inefficiency

Price ceiling

- upper limit - can benefit some people - government officials often do not understand supply and demand analysis

Price floors

- generally used for agricultural products ( a way to support the income of farmers) - lower limit - can cause unwanted surplus - governments disregard warnings of don't understand supply and demand models - they benefit some influential buyers of a good

How price floors cause inneficiency

- ineficient allocation of sales among sellers - waste of resources - sellers providing an inefficiently high-quality level - illegal activity can be encouraged

Quota limit

- control over quality (limit!) - use of licenses

Wedge

between demand price of the quantity transacted and supply price of the quantity transacted

Quota rent

Difference between demand and supply price at the quota limit

Price signals

Transfer information in markets