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NIU / Engineering / ECON 110 / What is the main law of supply?

What is the main law of supply?

What is the main law of supply?


Econ Exam 1 Study Guide  

What is the main law of supply?

Ch. 1,3-5  

Ch. 1 GISMO  

• Good Institutions - rules that govern interactions between agents and markets  • Are they free to make any choice?  

• Are they free to purchase/produce anything?  

• Ae there regulations and restrictions?  

• Are contracts enforced?  

• Incentives  

• rewards and penalties that motivate behavior  

• Adam Smith - people respond in predictable ways to incentives  

• Ex. prisoners on ship  

• Ex. Chinese farming village  

• Scarcity is everywhere  

• every resources we use is scarce, this leads to decision making  

• only our wants are unlimited  

• Marginal Thinking - comparing the additional cost to the additional benefit of consuming one more of  something  

What is the meaning of expected price?

We also discuss several other topics like What is the asset allocation?

• Opportunity Cost - the value of what is given p when ou make a choice  Don't forget about the age old question of What is the meaning of the regulation-biological control system?

• money standardizes cost, but the opportunity cost isn't always money related  

• Self interest aligns with social interest - unintentional society benefit, invisible hand  • Wealth and economy are related  

• specialization  

• output, investment, output  

• caution: speed doesn't always mean higher wellbeing  Don't forget about the age old question of What is statistical literacy and why is it important to be statistically literate?

• Trade offs - when everyone does their part, we all benefit  

• Economic boobs and busts happen and it’s okay  

• Fiscal policy- spending and taxes by gov  

• Monetary policy- amount of money in the system, by fed  If you want to learn more check out Define drug action in pharmacology.

• Fiscal policy and central banking is hard  

• Federal reserve is independent and self financing  

What is the meaning of initial assumptions?

• Can print money  

• Charged with keeping employment high and inflation low  



 Command and control  


Perfect competition assumed with mixed  

1. There are many buyers and sellers  

2. Homogeneous products  

3. Perfect information - we all know everything  

4. There are markets for everything  Don't forget about the age old question of What are primary and secondary meristem?

5. No spillovers  

Ch. 3 Supply & demand  


- how sellers will behave, how much they will offer at a given price  Don't forget about the age old question of What is the energy yield from each macronutrient?

- Law of supply - price up, quantity supplied down  

- Change in quantity supplied - movement ALONG the curve  

- Marginal cost - change in total cost, caused by producing ONE more unit  

Non Price Shift Factors  

1. Cost of Production - an increase in the cost of production will decrease the supply of that good  (supply)  

2. Opportunity Costs - if a firm produces A and B, and the price of good B increases, the supply of  good A will decrease (quantity supplied)  

3. Expected Future prices - if a firm expects prices to rise in the future, the supply of that good  today will decrease (supply)  

4. Number of Sellers - if the number of sellers of a good increases, the market supply of that good  will increase (supply)  

Cost of production =supply  

Price of good =quantity supplied  


- quantity demanded at different prices  

- Quantity demanded - quantity that buyers are willing and able to buy at a given price  - Law of Demand - price down, quantity demanded up  

- Consumer surplus - the consumer’s fain from exchange/ the difference between the max price a  consumer will pay for a certain quantity  

- Total consumer surplus - area below demand curve and above price  

Non Price Shift Factors  

1. Change in tastes  

2. Change in income  

- Normal good: income up, demand up  

- Inferior good: income up , demand down  

 3. Other goods  

- Compliment good: Demand of A up, demand of B up  

- Substitute good: demand of A up, demand of B down

 4. Expected Price - expect price to rise, today we will demand less. Trying to consume as much as   we can, while remaining in budget  

 5. Number of buyers - when buyers enter the market, demand increases  

Ch. 4 Supply w/demand  

• Market Equilibrium - where supply and demand curves cross and the market rests, no incentive to  change  

• Initial Assumptions  

• Supply - we have one firm providing the good that hs no control over price (they are not a  monopoly)  

• Demand - we have ten consumers with different marginal benefit from good (each can only  consume one)  

• Surplus - situation where quantity supplied is greater than quantity demanded  • drives prices down- sellers have incentive dot lower prices, and buyers have incentive to offer  lower prices  

• Shortage - quantity demanded greater than quantity supplied  

• drives prices up- sellers don't have as much to sell and can create competition for buyers to buy.  Buyers will pay more since there is a smaller quantity available  

• Buyers and sellers are not competing with each other. Buyers compete against buyers and same  with sellers  

• Equilibrium price - price where QD=QS, no incentive to push for change  

• Equilibrium quantity - QD=QS  

• Unexploited gains from trade at gueantity less than equilibrium quantity  

• Buyers still have unsatisfied wants, but resources are wasted if quantity is great than EQ. Rather  have quantity < EQ  

Free market maximizes gains from trade  

1. Supply of goods is bought by the buyers with highest willingness to pay  

2. Supply of goods is soul by sellers with lowest costs  

3. Between buyers and sellers, there are no unexploited gains from trade, and no wasteful trade  

Conditions for efficiency  

1. Demanders buy who have highest willingness to pay  

2. Supply of good sold with lowest costs  

3. Quantity traded must be an equilibrium  

Shocking the market  

1. Identify the shock  

2. Display the shock  

3. Identify changes in quantities  

4. Allow market to correct itself  

5. Find new equilibrium


• a measurement of how much you’re getting out of what you put in  

• Testing - first need to define efficiency in a way applicable to supply and demand model. to do so, we  use the ideas of consumer and producer surplus and total surplus  

• a market equilibrium is efficient if the total surplus cannot be made any greater by increasing the price  • Consumer surplus - the difference between what they are willing to pay, and what they actually pay  • Net benefit - what they saved  

• Producer surplus - profit, the difference between what you made and what it cost to make  Ch. 5 Elasticity  


• measures how responsive the quantity demanded is to a change in price  

• responsive = elastic  


• how easy it is to substitute one good for another  

• time to adjust to price  

• definition of market  

• geography  

• share of overall budget  


1. Demand  

2. Supply  

3. Income  

4. Crossprice  

Less elastic  

• Fewer substitutes  

• short run  

• categories of product  

• necessities  

• small % of budget  

More elastic  

• more substitutes  

• long run  

• specific brands  

• luxuries  

• large % of budget  


E= % change in quantity demanded/ % change in price  

E >1 =elastic (price and revenue move oppositely. Consumers are very responsive)

E <1 =inelastic (price & rev move together, consumers not responsive)  E=1 = unit elastic (when prices change, revenue will never change)  

Midpoint formula = Change in quantity demand/average quantity demanded  Change in price/average price  


how responsive the quantity supplied is to a change in price  

Es = % change in quantity supplied 

 % change in price  


• how quickly per unit costs increase with an increase in production  

• if increased production requires much higher per unit costs, then supply will be less elastic  • if production can increase without much cost increase then supply will be elastic  • supply of raw materials is usually inelastic  

Less elastic  

• difficult to increase production at constant unit cost  

• global supply  

• large share of market for inputs  

• short run  

More elastic  

• easy to increase production at constant cost  

• local  

• small share of market  

• long run

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