Sustainable Economics

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) 

• 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. 

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

• 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)

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)

• 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)

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