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NYU / Engineering / ECON 101 / What correlation is represented in ceteris paribus?

What correlation is represented in ceteris paribus? Description

Description: These notes cover Supply, Demand, curves, shifts, and real life examples (chapter 3). They also cover government involvement in the economy and how they can affect supply and demand.
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September 13th, 2016

What correlation is represented in ceteris paribus?

DEMAND: when you talk about the demand side, you are referring to the behavior of the  buyers

demand vs. quantity demanded (QD)

--demand=desire? NO

--QD: amount of any good/service that all buyers decide to choose during a period of  time given constraints (income, prices)

-implies choice: there is always opportunity cost

-hypothetical (if, they)

-ex) if coffee is \$1, I buy more; if coffee is \$5, I buy less

-depends on price (P)

-it is a point ALONG the curve

What does flow variable mean?

Don't forget about the age old question of When does an electron become a non-bonding electron?

Ceteris Paribus: QD is a relationship b/w P and amount of good/service demanded @each  price

-inverse relation (if price falls, QD increases); downward sloping curve  **this relationship given all factors constant is called Law of Demand**  DRAW CURVE

Example: maple syrup

--the higher the price per bottle, the less people will want the syrup  \$1 75,000

\$2 60,000

... ...

Note: price (P) is on y axis, quantity on x axis (this applied to both demand AND supply)  Why does the demand curve slope down? Inversely related

Demand vs quantity demanded cont'd

--demand: refers to the whole curve  Don't forget about the age old question of Where are hydrogen bonds found?

-when one of the factors held constant changes

How do people's taste and preference influence demand?

-increase in quantity, then curve shifts right

ex) income increase

Factors That Change The Demand Curve:

income and wealth

-wealth: everything I own - everything I over

-measure over a period of time: flow variable

Income Change/

Wealth normal (variable) inferior(variable)  Increase demand increase decrease in demand  Decrease demand decrease increase in demand

Inferior vs. Normal Good

--inferior goods: a good that people demand less of as income rises   -demand decreases and the curve shifts leftward

--normal goods: a good that people demand more of as income rises   ex) steak vs. potatoes  Don't forget about the age old question of What is an example of a polymer?

-curve shifts left for potatoes when income increases; it's cheaper and people  don't find it to be their standard of food anymore

prices of related goods

-substitute good: coffee is good x, tea is good y: if the price of tea(y) doubles,  then someone will drink more coffee in order to compensate...the quantity of coffee changes  but not the price

-complimentary good:coffee and creamer; if the price of coffee shoots up, then I will buy less creamer Don't forget about the age old question of What does style mean according to james smith pierce?

population

--more buyers, therefore an increase in demand

expected price

ex) I like dark chocolate, but cocoa beans are scarce, so dark chocolate price will  increase: I buy more dark chocolate NOW

-if buyers expect prices to rise, the current demand will shoot up  tastes/preferences

--if buyers start preferring an alternate good, then the demand of a current good will fall  and the demand curve will shift LEFT

ex) lost desire for apples and decided to opt for mangoes instead; demand for  mangoes rises and demand for apples decreased

SUPPLY: not fixed availability; what sellers choose to offer at each price (P) during a  period of time given constraints (input, price, technology) Don't forget about the age old question of Who came up with pasteurization?

--comes from the sellers: they choose to supply @ any P quantity that maximized profit   --quantity supplied

-relationship between P and amount of good/service offered at any point P   -positive relationship (if price increases, quantity increases)  **the constitutes to the Law of Supply**

the Law of Supply

--when price of good rises, everything else at a constant, the quantity of good supplied  will rise

--when sellers can get higher prices for goods, producing and selling become more  profitable  Don't forget about the age old question of How would you define the nucleotides in dna and rna?

ex) rise in the price of laptops but not desktops will encourage comp. makers to  focus more on laptops, not computers

--price and quantity supplied are POSITIVELY RELATED

--this translates to an upward curve on a graph, in contrast to the demand curve   -each point on the curve shows the quantity that sellers would choose to sell at a  specific price

--shifts along the curve:

-a change in price, we go ALONG the curve (a rise, we go right; a fall, we go  left)

--a shift in the supply curve

-when variables that we once held constant change (like to cost of transportation  of a good)

ex) if transportation of maple syrup drops, the seller is encouraged to supply  more bottles and the curve shifts RIGHT

Supply Schedule List (ex. Maple syrup)

Price Quantity Supplied

\$1 25,000 bottles supplied

\$2 40,000

-change in price (P) you move ALONG the supply curve

An increase in quantity at any given price: curve shifts right (INCREASE in supply)

Factors that Change the Supply Curve:

input price

--if they rise, supply less (b/c resources were more expensive) and supply curve will shift  LEFT

--there are many other factors and sources of labor that create a product, and a change  in price in any of those sectors shifts the supply curve

--if they decrease, supply more (b/c resources were less expensive) and supply curve  shifts RIGHT

price of alternatives

--alternate/substitute IN PRODUCTION

--firms can switch their production of goods and services easily, depending on which  they will will give them the most or least amount of profit

--when price of alternative rises, supply curve shifts leftward)

ex) maple syrup comes from maple sap: could make maple syrup OR instead make maple  sugar depending on which will be more profitable

number of firms in industry/market

--if more people decide to get involved in a particular market, the supply of that good  would increase and curve shifts RIGHT

--if firms decide to leave the market, supply decreases and curve shifts LEFT  ex) maple syrup market: more vendors decide to sell maple syrup, and so more bottles will end  up being produced; increase in supply, this shifts the graph to the RIGHT  technology

--technological advances increase the supply of a good

--not only is it more advanced, but it's cheaper and more new

ex) replacing sap buckets by tubes draining into a central container for boiling  changes in weather/natural events

-if weather is good, supply will increase

ex) our weather in the US is very good right now, and so we have excess in corn  expected price

--expectations of future prices of a good will affect the supply and therefore shift the  supply curve

--if the firm expects market prices will drop next month, up the production and sell  more now

--if expectation of a future price rising, the curve shifts LEFT

--if expectation of a future price falls, the curve shift RIGHT

INTERACTION OF SUPPLY AND DEMAND

what price (P) will actually prevail in the market? It generally hovers around some particular  level aside from a natural disaster, etc...

--market is in a state of rest

-**equilibrium**

-BOTH price and quantity are stable

When the market is at an Equilibrium...

--state of rest

--price of the good and quantity bought are leveled out

--equilibrium price

-price is at a constant until supply or demand curve shifts   --equilibrium quantity

-the amount bought of a good remains constant until supply to demand curve  shifts

--finding the equilibrium...

-draw supply and demand curves

-find where the two curves intersect one another

-equilibrium price s found vertically, equilibrium quantity is found horizontally  When the variables that were once held at a constant change, supply or demand curve shifts,  therefore a NEW EQUILIBRIUM

--a shift in demand causes both equilibrium price, equilibrium quantity to rise and a  movement ALONG the supply curve

--a shift in supply (like due to bad weather) causes supply curve to shift to left and equilibrium  price rises while equilibrium quantity falls; movement ALONG the demand curve   --if we combine two variables, then both curves shift

Chapter 3 Cont'd

NOTE: When BOTH curves shifts (D and S) we can determine the direction that BOTH, the  equilibrium P AND Q will move

Practice:

Draw a graph for each of the following

Notes change in EQUILIBRIUM P and Q

Increase in D and S

Increase in D, decrease in S

Decrease in D and S

Decrease in D, increase in supply

The Mathematics of Supply and Demand

Demand Function: Qd=100-2P

NOTE: the minus implies an INVERSE relationship

Supply Function: Qs=3P

NOTE: the positive coefficient indicated an upward slope

How do we get quantities? Insert price into either demand or supply function  Qs=3(20)=60

Qd=100-2(20)

Equilibrium

--QD=QS

Total Expenditure (TE)

--price is multiplied by quantity

--in this case: (20)(60)=1200

Always try to get price (P) on the left side

Set them EQUAL to find the equilibrium

Chapter 4

--there are two ways in which the government can intervene to change the free market  equilibrium (P*,Q*)

-they try and fight the market when they're not okay with the prices   -they manipulate the market by imposing taxes and subsidies

Fighting the Market: Price Ceilings

--price ceiling

-regulation

-the government imposes a maximum price for a good in a market in response  to a steep price

-government thinks prices are too high

-producers cannot charge more than what the government has issued

Ex) buyers are complaining that the price of chocolate at \$5 a bar is too expensive;  government issues a price ceiling and the good cannot be on the market for more than \$3.50   -the decrease in price will make sellers want to supply less(quantity supplied),  and so we move ALONG the supply curve

-the decrease in quantity supplied will lead to an increase in quantity demanded  and so we move along the demand curve

NOTE: when QS and QD differ, the short side of the market will prevail

-in the case above with the chocolate: QS is less than QD, so SELLERS are on  the short side of the market

-results in a shortage of chocolate bars

**a price ceiling creates a shortage and OC increases for customers/buyers that now wait on  long line and spend time trying to get the product**

-price ceilings lead to black markets: where goods are sold illegally at higher  prices buy are more attainable for buyers

**the combo of price ceilings and black markets lead to the buyer paying more for the good  than necessary**

Ex) rent control---price ceiling in the rental market (in large cities)

-goal is to keep housing affordable

Problem: black market price in rental units is higher than controlled P

Fighting the Market: Price Floors

--benefits sellers

--a minimum amount below which the price cannot fall

--is used to raise prices of goods

--for agriculture goods (they tend to have very low prices for their goods): also called  "price support programs"

-government policy still maintains price floors for peanuts, sugar, and dairy  products

ex) dairy products

-government has SEPARATE floor prices for butter cheese and non fat dairy milk

-the prices of these separate dairy products boost prices with dairy products,  even those without floor prices (like whole milk)

-if the prices for whole milk were plummeting, dairy industry would produce less  whole milk and focus more on the dairy products that DO have floor prices (like butter, cheese  and non-fat dairy milk)

-floor prices lead to quantity demanded to DECREASE, but since the price  cannot go down further than the minimum, there is a surplus

NOTE: this can lead to farmers/sellers selling illegally at a price below the floor   -this pressures the farmers that do abide by floor prices to do the same and  eventually the price floor collapses

Maintaining a Floor Price

to avoid collapse: governments develop a variety of policies

--in the US: government promises to buy any unsold product at a guaranteed price  (nothing below the floor price)

--before even having to take the extra measure to butt off excess supply, the  government will try to avoid the price down to its equilibrium value

**price floors are usually accompanied by government efforts to limit any excess supplies**   --in order for government to eliminate costs, it controls the production and sale of milk  to manufacturers and processors

--government can order to pay farmers to not produce so much

**the government has also other means of influencing the market outcome: uses taxes or  subsidies

Taxes

--the goal is to collect revenue

--they distort the free market

--excise tax

-special tax on certain goods

ex) cigarettes

--when it is imposed, it can be collected from either the buyer or the seller  Statutory burden: burden on party that is responsible for sending the check to the government

tax incidence: the division of tax payment between buyers and sellers determined by  comparing the new (after tax) and old (pretax) market equilibriums

--the in incidence of a tax is collected from sellers generally falls on both sides of the  market; buyers pay more and sellers receive less for each unit sold

--the incidence of a tax that is collected from buyers will fall on both sides of the market

Manipulating the Market: Subsidies

--subsidy: the opposite of a tax

-the government MAKES a payment to the buyer or seller   -lowers prices to buyers and encourages people to buy the good   --a subsidy to buyers

ex) tuition: provide more than \$100 billions on scholarships and other assistance  to encourage getting a college education

--benefits both sides of the market; buyers pay less and sellers receive more for each  unit sold

--a subsidy to sellers

-same benefit as it is to buyers 9

**a subsidy paid to buyers shifts the demand curve upward by the amount of subsidy**

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