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OSU ECON 4001.01 - Surplus

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Econ 4001 1st Edition Lecture 3Outline of Last Lecture II. EconomicsA. DefinitionB. Two branchesIII. Explanation of Economic Agentsa. Consumersb. Workersc. FirmsIV. Role of PricesV. Positive vs. Normative analysisVI. Market BackgroundVII. Introduction to Supply and Demanda. Factors that affect demand curveb. Factors that affect supply curveVIII. Real vs. Nominal PricesOutline of Current Lecture IX. Equilibriuma. Surplus definitionb. Shortage definitionX. Conditions for Perfect CompetitionXI. Response to shifts in supply and demand curvesXII. Predicting Price and Quantity responses in curve shiftsXIII. Point Elasticity vs. Arc ElasticityXIV.Other Elasticitiesa. Long run vs. short runb. Income ElasticitiesCurrent Lecture- Equilibriumo Equilibrium is at the Intersection of supply and demando When the price is too high a surplus develops Surplus=excess supply and inadequate demando When the price is too low a shortage occurs Shortage= excess demand and inadequate supplyThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.o Nothing specific in the market moves it back to equilibrium when it’s in a surplus or shortage, but rather tensions overall move it back (also called the invisible hand, coined by Adam Smith)o Government involvement: price floor and price ceiling, when binding, create a permanent shortage or surplus- Conditions for Perfect Competitiono Many buyers+sellerso Identical goods and serviceso No one buyer or seller can affect the price- Response to shifts in supply and demand curveso Simultaneous shifts in supply and demand= price changes and quantity changes depending on magnitude of shift and steepness of supply and demand curveso When supply shifts outward  Price goes down and quantity goes upo When supply shifts inward  Price goes up and quantity goes downo When demand shifts outward  Price and quantity go upo When demand shits inward  Price and quantity go down- Predicting price and quantity response to curve shiftso Price Elasticity of Supply and demand can helpo Demand Elasticity- percent change in quantity demanded divided by the percent change in price Ep= (ΔQD/ΔP)x(P/QD)o Supply Elasticity- percent change in the quantity supplies divided by the percent change in price Ep= (ΔQS/ΔP)x(P/QS)o Linear demand curve slope is constant along the curve, however price and quantity are changing, so elasticity of demand is also changing (EP=1 is maximum revenue)- Point Elasticity vs. Arc Elasticityo Use midpoint method formula when considering the move along the demand curveo Elasticity=1 is unit elastic- Other Elasticitieso Income Elasticity: percent change in quantity demanded from a 1% change in income) Goods with negative income elasticity are inferior goods Goods with income elasticity greater than 1.0 are luxury goodso Cross price elasticity: substitute goods and complementso Short run vs. long run price elasticities For many goods and services, demand elasticity are lower in the short runthan in the long run For some durable assets, demand elasticity is higher in the short run than in the long run (example:


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