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Erstellt / Aktualisiert 23.01.2022 / 23.01.2022
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Fenster schliessen

For what reasons might a demand curve shift to the right or left? 

income - increase (right)

Preferences - the good becomes preferred (right)

Prices of substitute goods - price increase for substitutes (right)

Price of complementary goods - price decrease for complements (right)

Expectations - price expected to increase (right) 

 

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Normal vs. Inferior Goods

  • as income increases, the demand for a normal good will increase
  • as income increases, the demand for an inferior good will decrease. 

What is normal/inferior is subjective to the consumer. 

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Price Elasticity of Demand

a measure of how much the quantity demanded of a good responds to a change in the price of that good. 

|n| = 0; perfectly inelastic             |n| = infinity; perfectly elastic              |n| = 1; unit elastic 

where,

elastic = sensitive to price change |n| > 1

inelastic = not sensiive to price change |n| < 1

 

 

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Determinants of Price Elasticity 

  • availalbilities of close substitutes
    • no substitutes = less sensitive to changes in price (less elastic)
  • Necessities vs. luxuries
    • necessities are less sensitive to changes in price (less elastic)
  • Definition of market
    • the more narrow the market, the more sensitive to change sin price (more elastic)
    • market of 'apples' is more elastic than the market for 'food or fruit'
  • Time horizon
    • in shorter timeframes, the less sensitive to changes in price (less elastic)
Fenster schliessen

Determinants of Supply (shifts in supply curve to the right or left)

1. Price leads to movement along the supply curve: changes in quantity supplied 

2. Input prices: change in price per unit of good: when the price increases, the supply decreases (shift to left)

3. Technology: efficient production of products: more efficient, more supply (shift to right)

4. Expectations: if producers expect price per unit to increase, then less supply (shift to left)

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Market Equilibrium

  • where quantity supplied = quantity demanded
  • most efficient oucome for consumer and producer
  • the point where the supply and demand curves intercept is the equilibrium point 
    • i.e., when S (positive slope) = D (negative slope) ; that is the equilibrium point 
  • If D > S (due to a fixed price) then there is excess demand and the supply is unable to meet the demand in the market
    • counter act by:
      • ration the good (i.e., food stamps)
      • subsidize the supply (government gives funds to the supplier to help them meet the demand)

 

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Formulas: slope / elasticity of demand / point elasticity of demand 

slope = m=(y2-y1)/(x2-x1)

price elasticity of demand = % change Q / % change P 

point elasticity of demand = [(Q2 – Q1)/Q1] / [(P2 – P1)/P1] OR slope x P/Q

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Producer Surplus 

  • Consumer surplus measures the benefit that buyers receive from a good as the buyers themselves perceive it.

  • Willingness to pay is the maximum amount that a buyer will pay for a good - is the price lower/higher than how much you value the good 

    • Consumer surplus = willingness to pay – price