ECO 103 - Chapter 1 Appendix Notes
ECO 103 - Chapter 1 Appendix Notes Eco 103
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This 5 page Class Notes was uploaded by Shannon Surell on Saturday January 30, 2016. The Class Notes belongs to Eco 103 at Illinois State University taught by Amir Marmarchi in Spring 2016. Since its upload, it has received 40 views. For similar materials see Individuals and Social Choice in Economcs at Illinois State University.
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Date Created: 01/30/16
ECO 103 – Amir Marmarchi Chapter 1 Appendix Thursday, January 21 2016 - If you are buying something you are demanding it - If you are providing a good/service you are a supplier Assumptions of a supply/demand curve - Many buyers/sellers - Goods that are offered identical; sellers compete on basis of price - All buyers/sellers have perfect info about market Monopoly: they can set prices at anything they want because no one else can tell them otherwise Law of Demand: inverse relationship between price of food/service and quantity of good/service consumer wants to buy Demand curve: shows how many units of a good/service consumers are willing to buy at various prices - Line sloped downward - Price increases, Quantity Demanded decreases - Price decreases, Quantity Demanded increase - Price is on vertical axis - Quantity demanded on horizontal axis Law of Supply: positive (direct) relationship between price of good/service and quantity of good/service the seller is willing to offer - Line sloped upward - Price increase, quantity supplied increase - Price decrease, quantity supplied decrease Supply curve: indicates how many units of a good or service sellers are willing to offer for sale at various prices - Occurs because some producers are more effective than others - Could be because of an increase in production cost due to limited space/physical constraints Market Equilibrium: no upward or downward pressure on price - QD = QS - Point on graph where demand and supply curve cross Shortage: quantity of a good or service demanded is greater than the quantity supplied - QD > QS Surplus: quantity of a good or service supplied is greater than the quantity demanded - QD < QS To find shortage or surplus: 1) look at demand curve to see what is demanded 2) look at how much is supplied 3) subtract (in correct order) Types of changes: - Movement up the line (due to change in price) - Shift in line (many causes) Change in QD: movement along line Change in demand: shift of line Increase in supply: sellers increase the number of units of a good or service they are willing to produce at each price Sellers are only concerned with: - Price of product - Cost to produce it Increase in supply/demand – shift right Decrease in supply/demand – shift left Event Equilibrium Price Equilibrium Quantity Demand increase Increase Increase Demand decrease Decrease Decrease Supply increase Decrease Increase Supply decrease Increase decrease Tuesday, January 26 Factors that shift demand - Price of other goods o Complements: goods consumers like to consume together o Substitutes: goods that serve in place of another - Income o Normal goods: something you buy more of as income rises o Inferior goods: something you buy less of as their incomes rise Input/output supply Determinant Result of increase Price of complement Shift left Price of substitute Shift right Normal goods Shift right Inferior goods Shift left Taste for the good Shift right Factors that shift supply - Price of inputs: resources in production of good or service - Technology: efficiency that firms convert from input output - Price of substitute in production: different goods that can be produced with same inputs - Number of producers Determinant Result of increase Price of inputs Shift left Technology Shift right Price of substitutions Shift left Number of producers Shift right To find change: 1) Draw supply and demand graph 2) determine how event effects the graph (demand or supply curve?) 3) draw new supply or demand curve 4) find new equilibrium price or quantity and compare to original Price elasticity of demand: sensitivity of consumers buying behaviors to changes in prices, measured in percentage of change in QD for each 1% change in price Price elasticity of supply: sensitivity of QS to changes in price, measured as percentage change in QS by producers for each 1% of price Elasticity: % change in quantity ÷ % change in price - change in Quantity/quantity ÷ change in price/price - ignore the sign of the answer you get - Q = original QD/QS - P = original price - This is not the slope - At a given price level, elasticity is greater the flatter the curve o On a linear curve, elasticity is greater at higher prices - High elasticity = flat slope - Low elasticity = vertical slope - Elastic: % change in quantity larger than % change in price - Inelastic: % change in quantity smaller than % change in price - Unitary elastic: % change in quantity equals the % change in price (curved from top to bottom) - Perfectly inelastic: price changes have no effect on QD/QS (vertical) - Perfectly elastic: any price increase eliminates QD (horizontal) Determinants of Elasticity - Number of and closeness of substitutes o More substitutes less likely you are to pay higher prices for it and more likely to choose a substitute - Time o Longer you have to purchase a good, more likely you’ll wait to purchase that good - Percent of the budget o More of a budget a good consumes, more likely you will settle for something else Thursday, January 28 - If a point is at 0 for demand or supply, it will have an infinite amount of elasticity because anything will be better than 0 - Higher price = higher elasticity - Lower price = lower elasticity - Graph ALWAYS goes from infinity to 0 Elasticity of Supply - Ex) during growing season corn is inelastic - The percent change in QS divided by percent change in price - Supply curve slopes in opposite direction of demand curve Implications of Elasticity - Implies how different markets function - Impacts of market forces o If demand = inelastic, reducing the supply increases the prices o If demand = elastic, reducing the supply decreases the demand Ex) Government attempts to reduce illegal drug use by interrupting supply of drugs - Effectiveness of supply reductions depends on elasticity of demand o If demand = high elasticity, drug interference will be successful o If demand = high inelasticity, drug interference won’t cause much reduction of drug use, leading to an increase in their price
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