Lecture 3
Lecture 3 Money Price: Amount of money needed for a good Relative Price: Opp. Cost
Demand:
Law of Demand: Higher price of a good, lower demand – Vice Versa – Results from o Substitution Effect: When price of a good goes up, substitutes become relatively cheaper o Income Effect: When the price of a good goes up, the income the product for the purchase goes down
Demand Curve: P ↑ D ↓ Movement Along: Decrease/Increase in quantity demanded Shift: Change in no price factor in quantity demanded E.g. quantity ↑ Factors that change D: Price of related goods, income, pop, preferences Substitute: Good can replace another good Complement: Good that is used with another good Examples: o o o o o
Changes incur shift E.g. P ↓ of sub rises or P ↓ of complement = Shift →
Increase in income: → shift Expected future price ↑: Current D → shift Population: Larger pop, ↑ D → shift Normal Good: D → shift when Income → shift Inferior Good: D ↓ when Income ↓
Supply: Law of Supply: Higher the P, greater the Q supplied – Vice Versa Movement Along: Change in price alone Shift: Change in any other variable
Steps:
Factors that Change Supply: o Expected Future Price: EFP ↑, S of good ↓ → shift o Advance in Tech: → shift o Natural disaster: ← shift
Substitute: Another good that can be produced using same resources Complement: Must be produced together. E.g. wood = tables & mulch When QD = QS
1. 2. 3. 4. 5.
Decide if event is D or S Shift/move right or left? Draw new D/S curve Mark E2 Compare Es
Lecture 4 Elasticity:
εP = %△Qd/s/Qorig
Point-Formula
%△P/Porig
Mid-Point-Formula: Use only if question doesn’t state direction of P
εP = %△Q/Qavg %△P/Pavg
Elastic when > 1 Unit/Perfect Elasticity when = 1 Inelastic when < 1
Every part on linear demand curve has a different ε
ε = 1/slope * Porig/Qorig TR= P * Q
Factors that affect ε of D: o Substitutes: The closer the subs, the greater the ε o Time elapsed since P change – Time ↑ ppl have to adjust to price change, ↑ ε o Income: Greater income spent on good, the ↑ P Factors that affect ε of S: o Time Frame for supply decision: Short run S somewhat ε, long run S most ε o Resource Substitution possibilities: Unique a resource ↓εs – Harder for one to adjust
Cross ε = % △Q x / % △ P y Cross ε of substitute is positive – E.g. ↑ P of train, ↑ Q of cars Cross ε of complement is negative – E.g. ↑ P of petrol, ↓ Q of cars
Income ε = % △ Q / % △ Income (Y) Luxury Good: Iε > 1 normal good Necessity: Iε < 1 normal good Inferior Good: Iε < 0
“–“ important
Demand:
Law of Demand: Higher price of a good, lower demand – Vice Versa – Results from o Substitution Effect: When price of a good goes up, substitutes become relatively cheaper o Income Effect: When the price of a good goes up, the income the product for the purchase goes down
Demand Curve: P ↑ D ↓ Movement Along: Decrease/Increase in quantity demanded Shift: Change in no price factor in quantity demanded E.g. quantity ↑ Factors that change D: Price of related goods, income, pop, preferences Substitute: Good can replace another good Complement: Good that is used with another good Examples: o o o o o
Changes incur shift E.g. P ↓ of sub rises or P ↓ of complement = Shift →
Increase in income: → shift Expected future price ↑: Current D → shift Population: Larger pop, ↑ D → shift Normal Good: D → shift when Income → shift Inferior Good: D ↓ when Income ↓
Supply: Law of Supply: Higher the P, greater the Q supplied – Vice Versa Movement Along: Change in price alone Shift: Change in any other variable
Steps:
Factors that Change Supply: o Expected Future Price: EFP ↑, S of good ↓ → shift o Advance in Tech: → shift o Natural disaster: ← shift
Substitute: Another good that can be produced using same resources Complement: Must be produced together. E.g. wood = tables & mulch When QD = QS
1. 2. 3. 4. 5.
Decide if event is D or S Shift/move right or left? Draw new D/S curve Mark E2 Compare Es
Lecture 4 Elasticity:
εP = %△Qd/s/Qorig
Point-Formula
%△P/Porig
Mid-Point-Formula: Use only if question doesn’t state direction of P
εP = %△Q/Qavg %△P/Pavg
Elastic when > 1 Unit/Perfect Elasticity when = 1 Inelastic when < 1
Every part on linear demand curve has a different ε
ε = 1/slope * Porig/Qorig TR= P * Q
Factors that affect ε of D: o Substitutes: The closer the subs, the greater the ε o Time elapsed since P change – Time ↑ ppl have to adjust to price change, ↑ ε o Income: Greater income spent on good, the ↑ P Factors that affect ε of S: o Time Frame for supply decision: Short run S somewhat ε, long run S most ε o Resource Substitution possibilities: Unique a resource ↓εs – Harder for one to adjust
Cross ε = % △Q x / % △ P y Cross ε of substitute is positive – E.g. ↑ P of train, ↑ Q of cars Cross ε of complement is negative – E.g. ↑ P of petrol, ↓ Q of cars
Income ε = % △ Q / % △ Income (Y) Luxury Good: Iε > 1 normal good Necessity: Iε < 1 normal good Inferior Good: Iε < 0
“–“ important
