ECON Week V
ECON Week V econ 103-004
Popular in Microeconomic Principles
Popular in Economcs
This 4 page Class Notes was uploaded by Wesley Hunt on Sunday October 4, 2015. The Class Notes belongs to econ 103-004 at George Mason University taught by Donald Boudreaux in Fall 2015. Since its upload, it has received 73 views. For similar materials see Microeconomic Principles in Economcs at George Mason University.
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Date Created: 10/04/15
Theory of priceunderstand markets ratio you want to sell something Never exchange money itself you actually give up something you can t buy with the money Demand curvePer unit price along with quantity demanded Priceisolate the role of prices in an economy Inverse relation in price and quantity demanded one goes up and the other goes down More likely to buy if prices are lower What can cause the demand curve to change positions Six Determinants of Demand 7 Consumer Taste and Preferences Information Some things you are expected to outgrow Taste in ideas and products can change More or less willing to buy things when tastes change If you realize apples are healthy you go after them and vice versa 2 A Change in the price of substitute Goods 3 Two goods are considered substitutes if the prices for one item changes then demand for another changes in the same direction If pears and apples are substitutes price of pears will decline and demand in apples will decline LEFTWARD shift is a decline in demand A rise in the price of a substitute causes a shift to the right a fall in the demand causes a shift to the left Substitutes are also subjectivemost realworld goods can be determined as substitutes Prices of Complementary Goods 5 Goods that are compatiblecoffee and creamer world s full of them Two goods are complementary if as one price rises the demand falls Price of coffee goes through the roof so there s less creamer demanded Consumer Income The dosh in your bank has some impact on what you buy Normal vs Inferior Goods nothing to do with quality If as consumer income changes demand changes in that directionNormal Goods Inferior GoodsThe more money you have the less you want Income determines demand and direction depends upon your preference for the good Goods can be so cheap they are neither normal nor inferior Consumer Expectation of Future Availability of the Goods lf consumers come to expect the good will become more scarce in the future demand rises in anticipation lf consumers believe goods become easier to obtain in the future demand falls If a hurricane hits tomorrow gas demand goes up today Market Demand measures two or more purchasing individuals Demand of apples for a group or at a specific location Greater number of consumers the higher a good s demand Fewer consumers lower demand For any given demand curve the only thing that can cause the quantity demanded for a good to change are a change of the price of this good Will be on the TestDifferences in change of quantity demanded and change in demand ElasticityBy how much does a price change Elasticity answers that question As long as there is a downward slope it is a valid demand curve Easiest way to understand demandcompare relative elasticity amongst two curves The greater the increase in quantity demanded the more elastic the demand becomes E AQd AP Elasticity Formula Price range listed either elastic or inelastic Absnumber does not matter Elasticity Quotient is either greater or less than 1 E gt 1 Elastic E lt 1 Inelastic Elasticity measures how strongly the price change affects quantity Elasticity DOES NOT mean slope Total RevenueNothing other than the amount of revenue a firm takes in when they sell something Profit TR Cost Net gains You sell tomatoes at a market and you sell 10 lbs at 3lb How much did they spend 30 30 is your TR Quantity Price lf price and total revenue move in the same direction demand is inelastic lf price and TR are in opposite directions demand becomes elastic P 100 consumers buy 1 unit TR 100 TR actually goes up when price goes down because sales increase Determinants of Elasticity 1 Number of available substitutes o The greater the number of available substitutes the more elastic the demand and vice versa 0 Coke has ample substitutes which means if Coke hikes prices other goods can be bought If you are a consumer you want the demand to be as elastic as possibleyou want more substitutes for greater choices 2 Time Consumers have to adjust to price change Law of demand says something different If gas prices rise overnight they would not cut back right away Quantity demanded will fall longer over a year than it did when gas prices initially tripled If hiking in Death Valley without water the seller can hike the price of water and not have to worry 3 Percentage of Budget spent on Good Greater the budget the more elastic the good becomes The more you spend the more elastic your demand stays Favorite gum bought each week for 1 When price of gum hiked to 2 the idea to buy is not deterred Smallbudget items near inconsequential
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