The Law of Demand - There is an inverse relationship between price and quantity demanded; as price decreases quantity increases.
A change in price causes a change in quantity demanded. (ΔQD)
- Δ in buyers taste (advertising)
- Δ in number of buyers (population)
- Δ in income: Normal goods - goods that buyers buy more of when income rises; Inferior goods - goods buyers buy less of when income rises
- Δ in price of related goods: Substitute goods - serve roughly the same purpose to buyers (coca cola and Pepsi) Complementary goods - consumed together (Gas and automobiles)
- Δ in expectations (future)
Decrease in demand = shift to the left
Δ = Change
Supply - is the quantities that producers or sellers are willing and able to produce or sell at various prices.
The Law of Supply - There is a direct relationship between price and quantity supplied; Price increases quantity increases.
A Change in price causes a change in quantity supplied.
What causes a change in supply?
- Δ in weather
- Δ in technology
- Δ in taxes or subsidies ( money government gives)
- Δ in cost of production
- Δ in number of sellers
- Δ in expectations
Equilibrium - point at which the supply curve and demand curve intersect.
Point at which they intersect - economy is using all resources efficiently.
Shortage - QD > QS
Surplus - QS > QD
Price ceiling -government imposed limit on how high you can be charged for a product or service. (above the equilibrium spot. ex: minimum wage
Price floor - government imposed minimum on how low a price can be changed for on a product or service.
Fixed cost - a cost that does not change no matter how much is produced.
Variable cost - cost that fluctuates (to change) ex: gas
Formulas
o MC = New TC – Old TC
o TC = TTC + TVC or ATC / Q
o AFC = TFC / Q
o AVC= TVC / Q
o ATC = AFC + AFC or TC/Q
Elasticity
Elasticity of demand - tells how drastically buyers will cut back or increase their demand for a good when a price rises or falls.Elastic demand - when demand will change greatly given a small change in price.
"Wants" ex: Movie tickets E>1
Inelastic - your demand for a product will not change regardless of price.
"Needs" ex: milk, medicine, gasoline E<1
Unitelastic: E=1
Calculate:
- (new quantity - old quantity)/old quantity
- (new price - old price)/old price
- percent Δ in quantity / percent Δ in price
There are constant shifts when it comes to the supply and demand curve all a result of different determinants. Throughout the week we have discussed scenarios where we are given a market and a change in the market. In one of the scenarios the market discussed is the corn market and the scenario is a bug infestation. None of the determinants seem to go with the scenario. Under what determinant do you believe this falls under? and Why?
ReplyDeleteI really enjoyed the graphics of which you have included on your post. They helped me visualize and better understand the concept at hand. Specifically the Increase Supply and Increase Demand graph. I was confused of which way the lines had to move. With the visual I was able to finally understand the movement of the lines when an increase had occurred.
ReplyDeleteOne thing that I would suggest you do is that you explain the formulas and what the abbreviations actually stand for.