Micro week 3 notes
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This 5 page Class Notes was uploaded by Vanessa Notetaker on Wednesday January 27, 2016. The Class Notes belongs to at Florida State University taught by Calhoun in Winter 2016. Since its upload, it has received 8 views.
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Date Created: 01/27/16
WEEK 3 NOTES Consumer choice and the law of demand Relationships: Relationship between Quality and Quantity Quality Quantity The Law of Demand: Inverse relationship between price and quantity demanded: when price rises, quantity demanded falls Quantity demanded is a number; its how many units of a good you bought Ways to express law of demand: 1. Words 2. Table 3. Math equation 4. Picture Price Quantity Demanded Why is the demand curve downward sloping? Diminishing marginal utility o The marginal benefit you receive from an item falls as you gain more of the item o The only way to get you to buy more is to lower the price How do consumers react to price changes? When the price of one good falls, people substitute away from relatively more expensive good to the relatively cheaper goods Called the substitution effect When the price of one good falls, real consumer income rises so people buy more (its like getting a raise) Called the income effect Both of those also cause the demand curve to the downward slope The demand curve represents your willingness to pay (your maximum), not how much you actually paid What if the actual price is lower than your willingness to pay? In economics, we call this difference consumer surplus (CS) Price Consumer surplus (arrow, under the curve) Demand P1….. Q1 Quantity demanded Changes in Demand Versus Quantity demanded Demand is the relationship between two variables: price and quantity demand Changes: 1. When price changes, quantity demanded changes but demand does NOT change a. This is a movement along a demand curve 2. When something else changes, demand changes (i.e., the relationship changes) a. Movement of the entire curve Typical something else changes: Income Number of consumers Prices of related goods (substitutes and complements) Expectations Demographics Another way to think about the difference between demand and quantity demanded Why is the consumer buying more (or less)? If the price is the reason, then quantity demanded changes; move along the demand curve If any variable besides price is the reason, then demand changes; shift the demand curve P P P2 P1 P1 D2 P2 D D1 Q1 Q2 Q Q1 Q2 Q Price goes down, quantity goes up. Bought more for “other” reasons (i.e., party, healthier options.) This will cause a demand curve SHIFT. The price for one good can be intimately tied to demand for another good. 1. Substituted goods used in place of each a. An increase (decrease) in price for the first good will increase (decrease) demand for the second good 2. Complement goods – usually consumed at the same time a. An increase (decrease) in price for the first good will decrease (increase) demand for the second good Goal: Explain and Predict Firm Behavior The law of supply: o The positive relationship between price and quantity supplied; when price rises, quantity supplied rises o Quantity supplied is a number; it’s how many units of a good you made Ways to express Law of Supply: 1. Words 2. Table 3. Math equation 4. Picture Price Supply Quantity supplied Why is the supply curve upward sloping? At a higher price, a product is usually more profitable so a firm has a stronger incentive to make more. What if the actual price is higher than your minimum price? In economics, we call this difference the producer surplus (PS) Graphically, PS is the area above the supply, out to quantity, and up to price P Supply P1 Producer surplus QS1 Q supplied Price isn’t the only factor that determines how much a firm makes Changes: 1. When price changes, quantity supplied changes but supply does NOT change a. This is a movement along the curve 2. When something else changes, supply changes (i.e., the relationship changes) a. This is movement of the entire curve Typical “something else” changes Resource prices Technology Nature Political Taxes Another way to think about the difference between supply and quantity supplied Why is the firm producing more (or less)? If price is the reason, then quantity supplied changes; move along the supply curve If any variable besides price is the reason, then supply changes; shift the supply curve P S1 P S1 P2 S2 P1 P1 Qs1 Qs2 Qs QS Qs1 Qs2
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