Economics 201

INTERMEDIATE MICROECONOMICS

Fall 2016
 
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B.  Supply and Demand

1. Supply

  • Concerned with sellers or the producers of a product

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a. Supply curve

  • Relationship between price and the quantity of a good producers are willing to sell, assuming all other factors remain constant

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  • Change in quantity supplied - movement along the supply curve

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b. Changes in supply

  • A shift of the entire supply curve

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  • Caused by changes in:

(1) Prices of inputs

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(2) Technology

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2. Demand

  • Concerned with buyers or consumers of a product

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a. Demand curve

  • Relationship between price and the quantity of a good consumers are willing to buy, assuming all other factors remain constant

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  • Change in quantity demanded - movement along demand curve

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b. Changes in demand

  • A shift of the entire demand curve

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  • Caused by changes in:

(1) Income 

(a) Normal good - more of the good is demanded as income increases

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(b) Inferior good - less of the good is demanded as income increases

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(2) Prices of related goods

(a) Substitutes - use one good instead of another

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(b) Complements - use goods together

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(3) Tastes and preferences

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3. Equilibrium

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  • Disequilibrium

a. Shortage

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b. Surplus

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4. Market changes

a. Changes in demand

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b. Changes in supply

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5.  Elasticity

  • Measures the responsiveness of quantity to a change in some factor

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a. Price elasticity of demand

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(1) Categorizing goods

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(2)  Linear demand curve

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(3)  Extreme cases of the price elasticity

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b.  Other elasticities

(1)  Income elasticity of demand

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(2)  Cross-price elasticity of demand

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(3)  Price elasticity of supply

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c.  Calculation

(1)  Point elasticity

  • Elasticity at a particular point

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(2)  Arc elasticity

  • Elasticity over a range

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d.  Short-run vs. long-run elasticity

(1)  Demand

  • More elastic in the long-run - more time to find alternatives

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(a)  Impact of durability

  • Demand more inelastic in the long-run

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(b)  Income elasticity

  • Usually higher in the long-run

  • Opposite for durable goods

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(c)  Cyclical industries

  • Significantly affected by the business cycle

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(2) Supply

  • More elastic in long-run - constraints can be eased

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  • Impact of durability

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