Key notes and formulas
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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)
Normal vs. Inferior Goods
What is normal/inferior is subjective to the consumer.
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
elastic = sensitive to price change |n| > 1
inelastic = not sensiive to price change |n| < 1
Determinants of Price Elasticity
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)
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
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
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