1. Supply and Demand Together
1.1. The Law of Demand
1.1.1. The law of demand holds that the demand level for a product or a resource will decline as its price rises, and rise as the price drops.
1.2. The Law of Supply
1.2.1. The law of supply says higher prices boost supply of an economic good while lower ones tend to diminish it.
1.3. Equilibrium Price
1.3.1. A market-clearing price balances supply and demand, and can be graphically represented as the intersection of the supply and demand curves.
1.4. Factors Affecting Demand
1.4.1. Income
1.4.2. preference
1.4.3. Alternative products
1.5. Factors Affecting supply
1.5.1. Production expense
1.5.2. Competitive dynamics
1.5.3. Taxes and regulations
1.6. Product's price elasticity
1.6.1. The degree to which changes in price translate into changes in demand and supply is known as the product's price elasticity.
1.6.2. Demand for basic necessities is relatively inelastic, meaning it is less responsive to changes in their price.
2. Supply
2.1. The quantity supplied: is the amount that sellers are willing and able to sell.
2.2. Law of supply: the quantity supplied of a good rises when the price of the good rises, other things equal
2.3. Supply schedule: A table that shows the relationship between the price of a good and the quantity supplied.
2.3.1. Example: Starbucks’ supply of lattes.
2.4. Supply Curve Shifters: The supply curve shows how price affects quantity supplied, other things being equal.
2.4.1. Input Prices: wages, prices of raw materials.
2.4.2. Technology: determines how much inputs are required to produce a unit of output.
2.4.3. # of Sellers: An increase in the number of sellers increases the quantity supplied at each price, shifts S curve to the right.
2.4.4. Expectations
2.4.4.1. Example: In response, owners of Texas oilfields reduce supply now, save some inventory to sell later at the higher price.
2.4.5. Price ceiling: a legal maximum on the price of a good or service
2.4.5.1. The ceiling is a binding constraint on the price, causing a shortage.
3. Government Policies
3.1. Price controls
3.1.1. Price floor: a legal minimum on the price of a good or service
3.1.1.1. The floor is a binding constraint on the wage, causes a surplus
3.1.2. Evaluating Price Controls: Intended to help the poor, but often hurt more than help.
3.2. Taxes: The govt can make buyers or sellers pay a specific amount on each unit bought/sold
3.2.1. The govt levies taxes on many goods & services to raise revenue to pay for national defense, public schools.
3.2.2. The govt can make buyers or sellers pay the tax.
3.2.2.1. A tax on buyers shifts the D curve down by the amount of the tax.
3.2.2.2. A tax on sellers shifts the S curve up by the amount of the tax.
3.2.3. The tax can be a % of the good’s price or a specific amount for each unit sold.
3.2.4. Elasticity and Tax Incidence: It’s easier for buyers than sellers to leave the market.Sellers bear most of the burden of the tax.
3.3. Shortages and Rationing
3.3.1. A shortage: sellers must ration the goods among buyers.
3.3.1.1. Long lines
3.3.1.2. Discrimination according to sellers’ biases
3.3.2. Prices aren't controlled
3.3.2.1. Efficient: the goods go to the buyers that value them most highly
3.3.2.2. Impersonal: fair
3.4. Min wage laws: do not affect highly skilled workers but do affect teen workers.
4. Price Elasticity of Supply
4.1. Price Qs elasticity = -------- of supply P
4.2. Price elasticity of supply measures how much Qs responds to a change in P.
4.3. The Variety of Supply Curves
4.3.1. The slope of the supply curve is closely related to price elasticity of supply.
4.3.2. Rule of thumb: The flatter the curve, the bigger the elasticity. The steeper the curve, the smaller the elasticity.
4.3.3. Five different classifications.…
4.3.3.1. Perfectly inelastic
4.3.3.2. Inelastic
4.3.3.3. Unit elastic
4.3.3.4. Elastic
4.3.3.5. Perfectly elastic
4.4. The Determinants of Supply Elasticity
4.4.1. The more easily sellers can change the quantity they produce, the greater the price elasticity of supply.
4.4.2. For many goods, price elasticity of supply is greater in the long run than in the short run, because firms can build new factories, or new firms may be able to enter the market.
4.4.3. For example: Supply of beachfront property is harder to vary and thus less elastic than supply of new cars.
4.5. How the Price Elasticity of Supply Can Vary
4.5.1. Supply often becomes less elastic as Q rises, due to capacity limits.
4.6. Other Elasticities
4.6.1. Income elasticity of demand: measures the response of Qd to a change in consumer income.
4.6.1.1. Income Percent change in Qd elasticity = ----------------------------- of Percent change in income demand
4.6.1.1.1. An increase in income causes an increase in demand for a normal good. -Hence, for normal goods, income elasticity > 0. -For inferior goods, income elasticity < 0.
4.6.2. Cross-price elasticity of demand: measures the response of demand for one good to changes in the price of another good .
4.6.2.1. Cross-price % change in Qd for g1 elast of = ----------------------------- demand % change in Qd for g2
4.6.2.1.1. For substitutes, cross-price elasticity > 0 (e.g., an increase in price of beef causes an increase in demand for chicken)
4.6.2.1.2. For complements, cross-price elasticity < 0 (e.g., an increase in price of computers causes decrease in demand for software)
4.6.3. Cross-Price Elasticities in the News
4.6.3.1. ''As Gas Costs Soar, Buyers Flock to Small Cars” -New York Times, 5/2/2008
4.6.3.2. “Gas Prices Drive Students to Online Courses” -Chronicle of Higher Education, 7/8/2008
4.6.3.3. “Gas prices knock bicycle sales, repairs into higher gear” -Associated Press, 5/11/2008
4.6.3.4. “Camel demand soars in India” (as a substitute for “gas-guzzling tractors”) -Financial Times, 5/2/2008
4.6.3.5. “High gas prices drive farmer to switch to mules” -Associated Press, 5/21/2008
5. The Costs of Taxation
5.1. Tax
5.1.1. Define
5.1.1.1. The same Define of Taxes in part Government Policies
5.1.2. Effects
5.1.2.1. Drives a wedge between the price buyers pay and the price sellers receive.
5.1.2.2. Raises the price buyers pay and lowers the price sellers receive
5.1.2.3. Reduces the quantity bought & sold
5.1.3. Deadweight loss (DWL)
5.1.3.1. Define
5.1.3.1.1. Deadweight loss refers to the loss of economic efficiency that occurs when the equilibrium for a good or service is not achieved due to external factors such as taxes or subsidies.
5.1.3.2. DWL and the Elasticity of Demand
5.1.3.2.1. When supply is inelastic-> Harder for firms to leave the market -> DWL is small.
5.1.3.2.2. When supply is more elastic -> Easier for firms to leave the market-> DWL is greater
5.1.3.2.3. When demand is inelastic-> Harder for consumers to leave the market-> DWL is small
5.1.3.2.4. When demand in elastic -> Easier for consumers to leave the market-> DWL is greater
5.1.3.3. DWL and the Size of the Tax
5.1.3.3.1. Doubling the tax causes the DWL to more than double.
5.1.3.3.2. When tax rates are low, raising them doesn’t cause much harm, and lowering them doesn’t bring much benefit. When tax rates are high, raising them is very harmful, and cutting them is very beneficial.
6. Demand
6.1. The quantity demanded: the amount of the good that buyers are willing and able to purchase.
6.2. Law of demand: the quantity demanded of a good falls when the price of the good rises, other things equal
6.3. The Demand Schedule: a table that shows the relationship between the price of a good and the quantity demanded
6.4. Demand Curve Shifters: shows how price affects quantity demanded, other things being equal.
6.4.1. Buyers: Increase in # of buyers increases quantity demanded at each price, shifts D curve to the right.
6.4.2. Income
6.4.2.1. Normal Good: Increase in income causes - Increase in quantity demanded at each price, shifts D curve to the right.
6.4.2.2. Inferior Good: Negatively related to income. An increase in income shifts D curves for inferior goods to the left.
6.4.3. Prices of Related Goods
6.4.3.1. Substitutes: an increase in the price of one causes an increase in demand for the other.
6.4.3.1.1. Example: pizza and hamburgers. An increase in the price of pizza increases demand for hamburgers, shifting hamburger demand curve to the right.
6.4.3.2. Complements: an increase in the price of one causes a fall in demand for the other.
6.4.3.2.1. Example: computers and software. If price of computers rises, people buy fewer computers, and therefore less software. Software demand curve shifts left.
6.4.4. Tastes: Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the right.
6.4.4.1. Example: The Atkins diet became popular in the ’90s, caused an increase in demand for eggs, shifted the egg demand curve to the right.
6.4.5. Expectations: Expectations affect consumers’ buying decisions.
6.4.5.1. Examples: If people expect their incomes to rise, their demand for meals at expensive restaurants may increase now.
7. Elasticity
7.1. Elasticity is a numerical measure of the responsiveness of Qd or Qs to one of its determinants.
7.2. Elasticity measures how much one variable responds to changes in another variable.
7.2.1. One type of elasticity measures how much demand for your websites will fall if you raise your price.
7.3. Price Elasticity of Demand
7.3.1. Price Qd elasticity = -------- of demand P
7.3.2. Price elasticity of demand: measures how much Qd responds to a change in P.
7.3.3. Calculating Percentage Changes
7.3.3.1. end value – start value ------------------------------ x 100% start value
7.3.3.1.1. The midpoint is the number halfway between the start & end values, the average of those values.
7.3.3.1.2. It doesn’t matter which value you use as the “start” and which as the “end” – you get the same answer either way!
7.3.4. Price Elasticity and Total Revenue
7.3.4.1. Price Q elasticity = ------- of demand P
7.3.4.2. Revenue = P x Q
7.3.5. Five different classifications
7.3.5.1. Perfectly inelastic demand
7.3.5.2. Inelastic demand
7.3.5.3. Unit elastic demand
7.3.5.4. Elastic demand
7.3.5.5. Perfectly elastic demand
8. Consumers, Producers, andthe Efficiency of Market
8.1. consumers surplus
8.1.1. consumers surplus
8.1.1.1. is the amount a buyer is willing to pay minus the amount the buyer actually pays: CS = WTP - P Total CS equals the area under the demand curve above the price, from 0 to Q.
8.1.2. Welfare economics
8.1.2.1. studies how the allocation of resources affects economic well-being.
8.1.3. willingness to pay
8.1.3.1. A buyer’s willingness to pay (WTP) for a good is the maximum amount the buyer will pay for that good
8.2. product surplus
8.2.1. (PS): the amount a seller is paid for a good minus the seller’s cost : PS = P - Cost Total PS equals the area above the supply curve under the price, from 0 to Q
8.2.1.1. CS, PS, and Total Surplus
8.2.1.1.1. CS = (value to buyers) – (amount paid by buyers) = buyers’ gains from participating in the market
8.2.1.1.2. PS = (amount received by sellers) – (cost to sellers) = sellers’ gains from participating in the market
8.2.1.1.3. Total surplus = CS + PS = total gains from trade in a market = (value to buyers) – (cost to sellers)
8.3. market Efficiency & Market Failure
8.3.1. Efficiency means
8.3.1.1. that total surplus is maximized
8.3.1.1.1. The goods are consumed by the buyers who value them most highly
8.3.1.1.2. The goods are produced by the producers with the lowest costs.
8.3.1.1.3. Raising or lowering the quantity of a good would not increase total surplus.
8.3.2. Market failure
8.3.2.1. E.g.: market power and externalities
8.3.2.2. The inability of some unregulated marke tsto allocate resources efficiently
8.3.2.3. Public policy
8.3.2.3.1. Can potentially remedy the problem
8.3.2.3.2. ncrease economic efficiency
8.4. laissez faire (French for “allow them to do”)
8.4.1. the notion that govt should not interfere with the market.