Microeconomics Midterm 1 Study Guide
Microeconomics Midterm 1 Study Guide ECON 1011
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This 14 page Study Guide was uploaded by Sophomore Notetaker on Friday October 7, 2016. The Study Guide belongs to ECON 1011 at Washington University in St. Louis taught by Bandyopadhyhyay in Fall 2016. Since its upload, it has received 107 views. For similar materials see Microeconomics in Economics at Washington University in St. Louis.
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Date Created: 10/07/16
Midterm 1 Study Guide Chapter 1 Economics is the study of how people make choices under conditions of scarcity and of the results of those choices for society. The Scarcity Principle (the NoFree Lunch Principle) – Although we have boundless needs and wants, the resources available to us are limited. So having more of 1 good thing usually means having less of another. The CostBenefit Principle – An individual (or a firm or society) should take and action if, and only if, the extra benefits from taking the action are at least as great as the extra costs. o Ex: if deciding whether to have 5 20seat classrooms or have a 100seat classroom, you would have to see if the value of the improvement in instruction outweighs its additional cost of $1000 per student Rational person – someone with welldefined goals who tries to fulfill those goals as best they can Economic surplus – the benefit of taking an action minus the cost o Choose an action that would generate the largest possible economics surplus Opportunity cost – the value of what must be forgone to undertake an activity 3 Important Decision Pitfalls #1: Measuring Costs and Benefits as Proportions rather than Absolute Dollar Amounts o Ex: Would you go downtown to save $10 on a $2,000 laptop/ $10 on a $25 videogame? Most replied no for the laptop but yes for the videogame since you are saving a higher percentage on the videogame and a very little percentage on the laptop This is faulty reasoning. The benefit of the trip downtown is not the proportion you save on the original price. Rather, it is the absolute dollar amount you save #2: Ignoring Implicit Costs o overlooking the implicit value of activities that fail to happen o Ex: Using your flight coupon for spring break or for wedding in Boston. The most you are willing to spend for spring break is $1,350. The flight costs $500 and your expenses will be $1000, totaling $1500, so $150 over your budget so you would not go. But if you used the coupon, you would save $500, and have an economic surplus of $350 in your budget. Since the wedding is not really optional, you would have to spend an additional $400 along with the $1000 you already spent. Your total for both trips would end up being $1400; $50 over your budget. You would not be able to go to your spring break trip The implicit cost of going on spring break would be the $400 you would spend going to the wedding #3: Failure to Think at the Margin o The only costs that should influence a decision about whether or not to take an action are those we can avoid by not taking the action o The only benefits we should consider are those that would not occur unless the action were taken o Sunk cost – costs that are beyond recovery at the moment a decision is made (irrelevant costs) Ex: money spent on a nontransferable, nonrefundable plane ticket Ex: paying $10 for a buffet o Marginal cost – cost of an additional unit of activity o Marginal benefit – the benefit of an additional unit of activity o Ex: NASA should continue to launch shuttles as long as the marginal benefit of the program exceeds the marginal cost o Average cost – the total cost of undertaking n units of an activity divided by n o Avg. benefit – the total benefit of undertaking n units of an activity divided by n o Measure the increment of activity under consideration not just the averages Normative Economics Vs. Positive Economics Normative Economic Principle – provides guidance about how we should behave o Ex: costbenefit principle – we should ignore sunk costs when making decisions about the future Positive Economic Principle – describes how we actually will behave o Costbenefit principle not always a positive (descriptive), economic principle Incentive Principle – A person (or a firm or society) is more likely to take an action if its benefit rises, and less likely to take it if its cost rises. In short, incentives matter. o A positive economic principle o Stress that the relevant costs and benefits usually help us predict behavior, but at the same time does not insist that people behave rationally in each instance. o Ex: if price of heating oil rises sharply, we would invoke the CB principle to say that people should turn their thermostats down and invoke the Incentive principle to predict that the average thermostat settings will in go down Microeconomics – describes the study if individual choices and of group behavior in individual markets Macroeconomics – the study of the performance of national economics and of the policies that governments use to try to improve that performance o Tries to understand things such as: national unemployment rate, the overall price level, and the total value of national input Chapter 2 Absolute Advantage – one person has an absolute advantage over another if he or she takes fewer hours to perform a task than the other person Comparative Advantage – one person has a comparative advantage over another if his/her opportunity cost of performing a task is lower than the other person’s opportunity cost Ex: it takes Mary 20 min. to program and 10 min. to fix a bike and Paula 30 min. for each of those. Mary has an absolute advantage over Paula in both activities since she can both do them faster. o But, Paula has a comparative advantage over Mary at programming. Paula’s opportunity cost of programming is 1 bike repair, whereas Mary’s opportunity cost of programming is 2x as high as Paula’s (2 bike repairs) o Mary has a comparative advantage over Paula at bike repairs since the opportunity cost of doing a bike repair is 0.5 web pages, whereas Paula has an opportunity cost of 1 web page per bike repair The Principle of Comparative Advantage – Everyone does best when each person (or each country) concentrates on the activities for which his/her opportunity cost is lowest Comparative Advantage and Production Possibilities Production Possibilities Curve (PPC) – a graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good o Downward slope shows the scarcity principle (idea that resources are limited) o Attainable point – any combination of goods that can be produced using currently available resources o Unattainable point – any combination of goods that cannot be produced using currently available resources o Inefficient Point – any combination of goods for which currently available resources enable an increase in the production of one good without reduction in the production of the other o Efficient Point – any combination of goods for which currently available resources do not allow an increase in the production of one good without a reduction in the production of the other o The slope of the PPC tells us the opportunity cost of producing an additional unit of the good measured along the horizontal axis o Ex: PPC – all combinations of coffee and nuts that can be produced with Tom’s labor Coffee on one axis and nuts on the other axis Points that lie along or within the curve are attainable Points that lie outside the curve are unattainable Points that lie along the curve are efficient Points that lie within the curve are inefficient PPC for a Large Economy –has a gentle outward bow shape o The bow shape means that the opportunity cost of producing nuts increases as the economy produces more of them (p. 46) The Principle of Increasing Opportunity Cost (LowHanging Fruit Principle) – In expanding the production of any good, first employ those resources with the lowest opportunity cost, and only afterward turn to resources with higher opportunity costs Factors That Shift the Economy’s Production Possibilities Curve/ Sources in Economic Growth Economic growth is an outward shift in the economy’s PPC. It can result from increases in the amount of productive resources available or from improvement in knowledge or technology that render existing resources more productive Investment in New Factories and Equipment o When workers have more and better equipment, their productivity increases Population Growth o But, because it also generates more mouths to feed, it can’t by itself raise a country’s standard of living; it may even cause a decline Improvements in Knowledge and Technology o Lead to higher output through increased specialization o Often increase spontaneously; frequently directly/indirectly the results of increases in education Specialization Capitalizes on preexisting differences in individual skills and deepens those skills through practice and experience Eliminates many of the switching and startup costs people incur when they move back and forth among numerous tasks (also applies to tools/equipment); breaking down a task into simple steps, each performed by a different machine, greatly multiplies the productivity of individual workers Why have some countries been slow to specialize? o Philosopher Adam Smith said that population density is an important factor that influences the degree of specialization Low population density is an obstacle since in some countries like Nepal, with its rugged terrain and long treacherous traveling to get to another village o May also be impeded by laws and customs that limit people’s freedom to transact freely with one another Having too much specialization would become to repetitive and machinelike and boring Comparative Advantage and International Trade North American Free Trade Agreement (NAFTA) – a treaty to reduce barriers between the U. S. and neighbors north and south o Many people opposed to it o Reducing barriers to international trade increases the total value of goods and services produced in each nation, but it doesn’t guarantee that each individual citizen will do better Outsourcing – having services performed by lowwage workers overseas o Cost savings benefit consumers and companies in the U.S., but jobs in the U.S. may be put in jeopardy o Computerizing tasks (breaking down into rules) are vulnerable to outsourcing Ex: ATM machines replaced some bank teller jobs o Facetoface communication, jobs that are less rules based, or that require someone to be physically present (repairs, construction) are the safest from outsourcing having a good education enables you to have a comparative advantage over others with less education Chapter 3 Capitalist, or freemarket, economies, people decide for themselves which careers to pursue and which products to produce and buy There are no pure freemarket economies today; most industrial economies are described as “mixed economies” o Their good and services are allocated by a combination of free markets, regulation, and other forms of collective control Buyers and Sellers in the Markets Market – the market for any good consists of all the buyers and sellers of that good o Ex: the market for a pizza any given day is the set of people potentially able to buy or sell pizza at that time and location Adam Smith and other economists thought that the market price of a good was determined by its cost of production; is it cost of product? Value to the user? It is both. Demand curve – a schedule or graph showing the quantity of a good that buyers wish to buy at each price o Price is on vertical axis, and quantity is on the horizontal axis o downwardsloping with respect to price Reasons demand curve slopes downwards o Individual consumer’s reactions to price changes substitution effect – the change in the quantity demanded of a good that results because buyers switch to or from substitutes when the price of the good changes income effect – the change in the quantity demanded of a good that results because a change in the price of a good changes the buyer’s purchasing power a consumer simply can’t afford to buy as many slices of pizza at higher prices as at lower prices o consumers differ in terms of how much they’re willing to pay for the good buyer’s reservation price – the highest dollar amount he’d be willing to pay for the good in most markets, different buyers have different reservation prices. When the good sells for a high price, it will satisfy the costbenefit principle test for fewer buyers than when it sells for a lower price the fact that the demand curve for a good is downwardsloping reflects that the reservation price of the marginal buyer declines as the quantity of the good bought increases horizontal interpretation of the demand curve – how much the consumers wish to purchase at various prices o start with the price on the vertical axis and read the corresponding quantity demanded on the horizontal axis vertical interpretation of the demand curve – tells us the marginal buyer’s reservation price o start with the quantity on the horizontal axis and then read the marginal buyer’s reservation price on the vertical axis supply curve – a schedule or graph showing the quantity of a good that sellers wish to sell at each price o upwardsloping with respect to price o slopes upward as a consequence of the Low Hanging Fruit Principle – as we expand production, we turn first to those whose opportunity cost of production is lowest, and then only then other with a higher opportunity cost horizontal interpretation of supply curve – begin with price and then go over to the supply cure to read the quantity that sellers wish to sell at that price on the horizontal axis o looks for quantity vertical interpretation of supply curve – begin with a quantity and then go up to the supply curve to read the marginal cost on the vertical axis o looks for marginal cost (price) seller’s reservation price – the smallest dollar amount for which a seller would be willing to sell an additional unit, generally equal to marginal cost o the smallest dollar amount for which she would not be worse off if she sold an additional unit Market Equilibrium equilibrium – a balanced of unchanging situation in which all forces at work within a system are cancelled by others o when no participant in the market has any reason to alter his or her behavior, so that there is no tendency for production or prices in that market to change intersection of the supply and demand curves for the good o equilibrium price – the price at which a good will sell o equilibrium quantity – the quantity at which of it that will be sold market equilibrium – occurs in a market when all buyers and sellers are satisfied with their respective quantities at the market price o they are only to buy exactly as many units of the good as they wish to at the equilibrium price o doesn’t necessarily produce an ideal outcome for all market participants; for a poor buyer this may signify little more than that he can’t buy additional pizza without sacrificing other more highly valued purchases excess supply – the amount by which quantity supplied exceeds quantity demanded when the price of a good exceeds the equilibrium price excess demand – the amount by which quantity demanded exceeds quantity supplied when the price of a good lies below the equilibrium price Incentive Principle – the mechanisms by which the adjustment happens are implicit in our definitions of excess supply and excess demand o Ex: sellers want to sell more than buyers are willing to buy, so sellers have an incentive to take whatever steps they can to increase their sales; so probably cut their prices (vice versa for buyers) o Price has tendency to gravitate to its equilibrium level under conditions of either excess supply or excess demand Economists realize that there are much more effective ways to help poor people than to try to give them apartments and other goods at artificially low prices Instead of controls over rent or other goods, they could give the poor additional income Regulations that peg prices below equilibrium levels have farreaching effects on market outcomes Price ceiling – a maximum allowable price, specified by law o A price ceiling below the equilibrium price of pizza would result in excess demand for pizza Predicting and Explaining Changes in Prices and Quantities Change in the quantity demanded – a movement along the demand curve that occurs in response to a change in price o The change in the quantity that people wish to buy that occurs in response to a change in price Change in demand – a shift of the entire demand curve o At every price, the quantity demanded is higher than before Change in the quantity supplied – a movement along the supply curve that occurs in response to a change in price Change in supply – a shift of the entire supply curve Complements – 2 goods are complements in consumption if an increase in the price of one causes a leftward shift in the demand curve for the other (or if a decrease causes a rightward shift) o Ex: tennis courts and tennis balls. Tennis balls would have little value if there were no tennis courts to play. As tennis court become cheaper to use, people will respond by playing more tennis, and this will increase their demand for tennis balls. A decline in courtrental fees will thus shift the demand curve for tennis balls to the right; “rightward or upward shift” o When the price of a complement falls, demand shifts right, causing equilibrium price and quantity to rise o Economists define goods as complements if an increase in the price of one causes a leftward shift in the demand curve for the other Substitutes – 2 goods are substitutes in consumption if an increase in the price of one causes a rightward shift in the demand curve for the other (or if a decrease causes a leftward shift) o Ex: email and overnight letters are examples of substitutes. A decrease in the prices for internet will cause a leftward/downward shift in the demand curve overnight delivery services. Cheaper internet access would cost many customers for UPS and FedEx. o When the price of a substitute falls, demand shifts left, causing equilibrium price and quantity to fall for the other good o Economists define goods as substitutes if an increase in the price of one causes a rightward shift in the demand curve for the other An increase in income shifts demand for a normal good to the right, causing equilibrium price and quantity to rise Normal goods – a good whose demand curve shifts rightward when the incomes of buyers increase and leftward when the incomes of buyers decrease Inferior goods – a good whose demand curve shifts leftwards when the incomes of buyers increase and rightward when the incomes of buyers decrease o Ex: apartments in unsafe neighborhoods, ground beef with high fat content Anything that changes the production costs will shift the supply curve, resulting in a new equilibrium quantity and price o Ex: the cost of fiberglass that is used to produce skateboards, so the number of potential sellers who can profitably sell skateboards at any given price will fall; this implies a leftward shift in the supply curve for skateboards o No shift in demand curve because the buyer’s reservation price doesn’t depend on the price of fiberglass The effects on equilibrium price and quantity run in the opposite whenever marginal costs of production decline o Ex: a decline in the wage rates of carpenters reduces the marginal cost of making new houses, which means that for any given price of houses, more builders can profitably serve the market than before; this means a rightward/downward shift in the supply curve of houses o No appreciable shift in the demand curve because carpenters only make up a tiny fraction of all potential home buyers Factors that causes supply curves to shift o Input prices o Technology o Weather o Expectations of future price changes o Changes in the number of sellers in the market 4 simple rules o an increase in demand will lead to an increase in both the equilibrium price and quantity o a decrease in demand will lead to a decrease in both the equilibrium price and quantity o an increase in supply will lead to a decrease in the equilibrium price and an increase in the equilibrium quantity o a decrease in supply will lead to an increase in the equilibrium price and a decrease in the equilibrium quantity Factors that cause an increase (rightward/upward shift) in demand o A decrease in the price of complements to the good or service o An increase in the price of substitutes for the good or service o An increase in income (for a normal good) o An increased preference by demanders for the good or service o An increase in population of potential buyers o An expectation of higher prices in the future o When these factors move in the opposite direction, demand will shift left Factors that cause an increase (rightward or downward shift) in supply o A decrease in the cost of materials, labor, or other inputs used in the production of the good/service o An improvement in technology that reduces the cost of producing the good/service o An improvement in the weather (especially for agricultural products) o An increase in the number of suppliers o An expectation of lower prices in the future o When these factors move in the opposite direction, supply will shift left When demand shifts left and supply shifts right, equilibrium price falls, but equilibrium quantity may either rise (if greater shift in supply than demand) or fall (if greater shift in demand than supply) Efficiency and Equilibrium A market that is out of equilibrium, always creates opportunities for individuals to arrange transactions that will increase their individual economic surplus A market for a good that is in equilibrium makes the largest possible contribution to total economic surplus only when its supply and demand curves fully reflect all costs and benefits associated with the production and consumption of that good Buyer’s surplus – the difference between the buyer’s reservation price and the price he/she actually pays Seller’s surplus – the difference between the price received by the seller and his/her reservation price Total surplus – the difference between the buyer’s reservation price and the seller’s reservation price o Sum of the buyer’s surplus and the seller’s surplus Cash on the table – an economic metaphor for unexploited gains from exchange o When the price in a market is below the equilibrium price, there’s cash on the table because the reservation price of sellers (marginal cost) will always be lower than the reservation price of buyers o When all beneficial opportunities for exchange have been exploited, there is not more cash on the table; when demand=supply, quantity=price Socially optimal quantity – the quantity of a good that results in the maximum possible economic surplus from producing and consuming the good o The level for which the marginal cost and marginal benefit of the good are the same When the quantity of a good is less than the socially optimal quantity, boosting its production will increase total economic surplus Economic efficiency – a condition that occurs when all goods and services are produced and consumed at their respective socially optimal levels o Failure to achieve efficiency means that total economic surplus is smaller than it could have been The Efficiency Principle – efficiency is an important social goal because when the economic pie grows larger, everyone can have a larger slice When the private market for a given good is in equilibrium, the cost to the seller of producing an additional unit of the good is the same as the benefit to the buyer of having an additional unit; the equilibrium quantity maximizes total economic surplus The Equilibrium Principle (“NoCashontheTable Principle) – a market in equilibrium leaves no unexploited opportunities for individuals but may not exploit all gains achievable through collective action Chapter 4 Price elasticity of demand – the percentage change in the quantity demanded of a good or service that results from a 1% change in its price o a measure of the responsiveness of the quantity demanded of that good to changes in its price o Ex: price of beef falls by 1% and the quantity demanded rises by 2%, then the price elasticity of demand for beef has a value of 2 o Adapts to other variations in price o Price elasticity of demand will always be negative (or 0) because price changes are always in the opposite direction from changes in quantity demanded o So we drop the negative and speak of price elasticity in terms of absolute value Percentagechange∈quantitydemanded = price elasticity Percentagechange∈price 2 o Ex: −1 = 1 Elastic – the demand for a good is elastic with respect to price if its price elastic of demand is greater than 1 (E > 1) Inelastic – the demand for a good is inelastic with respect to price if its price elasticity of demand is less than 1 (E < 1) Unit elastic – if the price elasticity is equal to 1 (E = 1) Determinants of Price Elasticity of Demand o Substitution Possibilities – can escape the effect of the price increase of a good by simply switching to the substitute product Suggests that demand will tend to be more elastic with respect to price for products for which close substitutes are readily available Ex: salt has no close substitutes, so demand for it is highly inelastic; while quantity of salt demanded is highly insensitive to price, but cannot be said for demand of a specific brand Ex: vaccine for rabies; no substitute, highly inelastic o Budget Share – the larger the share of your budget an item accounts for, the greater is your incentive to look for substitutes when the price of the item rises Big ticket items have higher price elasticities of demand o Time – the more efficient something is, the higher its price Price elasticity of demand for any good/service will be higher in the long run than in the short run The price elasticity of demand for a good/service tends to be larger when substitutes for the good are more readily available, when the good’s share in the consumer’s budget is larger, and when consumers have more time to adjust to a change in price Higher price elasticities for an item compared to others reflects that there are more close substitutes for it than the other item o Ex: green peas – 2.8, coffee – 0.3; more subs for peas than coffee o Food has low elasticity – few substitutes Luxury tax on yachts – a tax imposed on a good with high price elasticity of demand stimulates large rearrangements of consumption but yields little revenue A Graphical Interpretation of Price Elasticity ∆P/P = proportion by which price changes ∆Q/Q = proportion by which quantity changes ΔQ/Q Price Elasticity of demand = E = Δ P/P Ex: 20 units were sold are original price of $100 and price rose to $105, quantity demanded fell to 15 units E= 5/20 = 5 5/100 P 1 Price elasticity at a Point = x Q slope If 2 demands have a point in common, the steeper curve must be the less priceelastic of two with to respect to price at that point o Doesn’t mean steeper curve is less elastic at every point P/Q ratio declines as move down the demand curve elasticity declines E < 1 at any point below the midpoint (elastic) E > 1 at any point above the midpoint (inelastic) Midpoint, E = 1 (midpoint) Horizontal demand curve has slope = 0 o Reciprocal of slope = ∞ o E = ∞ at every point along the curve Perfectly elastic demand curve Vertical demand curve has slope = ∞ o Reciprocal of slope = 0 o E = 0 at every point along the curve perfectly inelastic demand Elasticity and Total Expenditure Elasticity of demand tells us if it is better to sell more units at a lower price, or less units at a higher price Total daily expenditure on a good is the daily number of units bought times the price for which it sells Total expenditure = total revenue: the dollar amount that consumers spend on a product (P x Q) is equal to the dollar amount that sellers receive Law of demand says when a price rises, people buy less of it A price increase will produce an increase in total revenue whenever it is greater, in percentage terms, than the corresponding percentage reduction in quantity demanded o Ex: increasing movie ticket prices from $2 to $4 (500 to 400 tickets); $2 $4 is a 100% increase in price, 500 400 tickets is a 20% reduction in quantity demanded; % price increase > % reduction in quantity demanded (worth it) o Ex: increasing movie ticket prices from $8 to $10 (200 to 100 tickets); $8 $10 is a 25% increase in price, 200 100 tickets is a 50% reduction in quantity demanded; % price increase < % reduction in quantity demanded (not worth it) For a good whose demand curve is a straight line, total expenditure reaches a maximum at the price corresponding to the midpoint of the demand curve o Total expenditure is highest at midpoint Rule 1: when E > 1, changes in price and changes in total expenditure always move in opposite directions (elastic) o For an elastically demanded product: % change in quantity > % change in price o change in quantity will offset the change in revenue per unit sold Rule 2: when E < 1, changes in price and changes in total expenditure always move in the same direction (inelastic) o For an inelastically demanded product: the % change in quantity < % change in in price o change in revenue per unit sold (price) will offset change in number of units sold Income Elasticity and CrossPrice Elasticity of Demand cross–price elasticity of demand – the percentage by which the quantity demanded of the first good changes in response to a 1% change in the price of the second o when the crossprice elasticity of demand for 2 goods is positive – the 2 goods are substitutes when it is negative, the 2 goods the 2 goods are complements income elasticity of demand – the percentage by which quantity demanded changes in response to a 1% change in income o income elasticity for inferior goods is negative, whereas the income elasticity of normal goods is positive these 2 elasticities may be positive or negative Price Elasticity of Supply price elasticity of supply – the percentage change in quantity supplied that occurs in response to a 1% change in price Ex: if a 1% increase in the price of peanuts leads to a 2% increase in the quantity supplied, the price elasticity of supply of peanuts would be 2 ΔQ/Q Price Elasticity of supply = E = Δ P/P Price elasticity at a Point = x 1 Q slope Price and quantity are always positive, so price elasticity of supply will be a positive number at every point Elasticity of supply will always = 1 at any point along a straight line supply curve that passes through the origin o Reason is that for movements along any such line, both price and quantity always change in exactly the same proportion Perfectly inelastic supply: E = 0 at every price o Vertical supply curve Perfectly elastic supply: o Horizontal supply curve The more easily additional units of these inputs can be acquired, the higher price elasticity of supply will be Determinants of Supply Elasticity o Flexibility of Inputs o Mobility of Inputs – if inputs can be easily transported from 1 site to another, an increase in price of a product I the market will enable a producer in that market to summon inputs from other markets Ex: the supply of agricultural products is made more elastic with respect to price by the fact that thousands of farm workers are willing to migrate north during the growing season Ex: the price elasticity of supply increases when a new highway is built or a telecommunication network improves; when any other development makes it easier to find transport inputs from 1 place to another o Ability to Produce Substitute Inputs – the introduction of a perfectly synthetic substitute for natural diamonds would increase the price elasticity of supply of diamonds o Time – the price elasticity of supply will be higher for most goods in the long run than in the short run In the short run, a manufacturer’s inability to augment existing stocks of equipment and skilled labor may make it impossible to expand output beyond a certain limit If a product can be copied and it the inputs needed for its production are used in roughly fixed proportions and are available at fixed market prices, then the longrun supply curve for that product will be horizontal Gas prices are more volatile than car prices; This is because: o Supply shifts are larger and more frequent in the gas market than in the car market o Supply and demand are less elastic in the short run in the gas market o The quantity of gas we demand depends largely on the kinds of cars we own and the amounts we drive them. In the short run, car ownership and commuting patterns are mostly fixed, so even if the price of gas were to change sharply, the quantity we demand would not change by much o The prospect of war creates the expectation of oil supply cutbacks that would cause higher prices in the future, which leads producers to withdraw some of their oil from current markets (in order to sell it later at higher prices) Price volatility is also common in markets in which demand curves fluctuate sharply and supply curves are highly elastic o Ex: California’s unregulated market for electricity in the summer of 2000; the supply of electrical generating capacity was fixed in the short run; it got unusually hot that summer, shifting the demand to the right, and price reaching 4x its highest level Highly talented players are the most important input of a winning team; they are a very limited supply o The supply of NBA championship teams is perfectly inelastic with respect to price even in the long run o In the long run, unique and essential inputs are the only truly significant supply bottleneck o If it were not for the inability to duplicate these services of such inputs, most goods and services would have extremely high price elasticities of supply in the long run
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