Econ 200 Final Study Guide Mitchell Reichenberg Chapter 4 The Market Forces of Supply and Demand 1 I II III IV V What is a Market a Market group of buyers and sellers of a particular good or service i Buyers determine demand ii Sellers determine supply What is Competiton a Price and quantity is determined by all buyers and sellers b Competitive Market sellers so that each has a negligible impact on the market price market in which there are many buyers and i Sellers have limited control of price ii Buyers cannot individually influence price c Perfectly Competitive i Goods offered for sale are all the same ii Buyers and sellers are so numerous that no single buyer or seller has influence the market price iii Both buyers and sellers are Price Takers must accept price the market determines the amount of any good that buyers are willing b Law of Demand market with only one seller d Monopoly The Demand Curve The Relationship Between Price and Quantity Demanded a Quantity Demanded and able to purchase of a good falls when the price of the good rises price of a good and the quantity demanded and the quantity demanded c Demand Schedule table that shows the relationship between the d Demand Curve graph of the relationship between the price of a food claim that other things equal the quantity demanded sum of all the individual demands for a particular Market Demand vs Individual Demand a Market Demand good or service Shifts in the Demand Curve a Increase in Demand every price shifts the demand curve to the right at every price shifts the demand curve to the left b Decrease in Demand c Variables That Shift Demand Curve any change that increases quantity demanded at and change that reduces the quantity demanded i 1 Normal Good Income increase in demand Inferior Good decrease in demand 2 good where increase in income leads to good where increase in income leads to 2 ii Price of Related Goods 1 Substitutes leads to increase in demand for the other two goods where increase in price of one a Often pairs of goods that are used in place of each other hot dogs and hamburgers etc 2 Compliments one leads to decrease in demand for the other two goods where increase in the price of a Often pairs of goods that are used together gas and cars iii Tastes iv Expectations v Number of Buyers d Changes in the price of the good itself cause a movement along the demand curve VI The Supply Curve The Relationship between Price and Quantity Supplied amount of a good that sellers are willing and able a Quantity Supplied b Law of Supply claim that other things equal the quantity supplied of c Supply Schedule table that shows the relationship between the price to sell a good rises when the price of the good rises of a good and the quantity supplied and the quantity supplied d Supply Curve graph of the relationship between the price of a good VII Market Supply vs Individual Supply VIII sum of the supplies of all sellers a Market Supply Shifts in Supply Curves Increase in Supply a price shifts supply curve to the right every price shifts supply curve to the left b Decrease in Supply c Variables That Shift Supply Curve any change that raises quantity supplied at every any change that reduces quantity supplied at i Input Prices ii Technology iii Expectations iv Number of Sellers supply curve IX Supply and Demand Together a Equilibrium d Changes in the price of the good itself causes a movement along the situation where the market price has reached the level at b Equilibrium Price the price that balances quantity supplied and which quantity supplied equals quantity demanded quantity demanded equilibrium price demanded c Equilibrium Quantity the quantity supplied and demanded at the d Surplus situation where quantity supplied is greater than quantity 3 i Also called Excess Supply situation where quantity demanded is greater than quantity e Shortage supplied i Also called Excess Demand f Law of Supply and Demand claim that the price of any good adjusts to bring the quantity supplied and quantity demanded for that good into balance Analyzing Changes in Equilibrium a Shifts in Curves vs Movements Along Curves i Shift in Supply Curve change in supply ii Shift in Demand Curve change in demand iii Movement Along Supply Curve change in quantity supplied iv Movement Along Demand Curve change in quantity demanded X Chapter 5 Elasticity and Its Application 4 I The Price Elasticity of Demand and Its Determinants a Elasticity measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants demanded of a good responds to the change of price of that good measure of how much the quantity b Price Elasticity of Demand PED i change in QD change in P 1 Always positive numbers absolute value ii Elastic iii Inelastic QD responds substantially to the changes in price QD responds only slightly to changes in price c Goods with close substitutes tend to have more elastic demand d Necessities tend to have inelastic demands e Luxuries tend to have elastic demands f Narrowly defined markets tend to have more elastic demands than broadly defined markets when elasticity is greater than 1 g Goods tend to have more elastic demand over longer time horizons The Midpoint Method a PED Q2 Q1 Q2 Q1 2 P2 P1 P2 P1 2 The Variety of Demand Curves a Elastic b c Unit Elastic d Perfectly Inelastic e Perfectly Elastic Total Revenue and the Price Elasticity of Demand a Total Revenue TR when elasticity equals infinity horizontal curve Inelastic when elasticity equals zero vertical curve when elasticity is less than 1 when elasticity is equal to 1 amount paid by buyers and received by sellers of II III IV a good i TR PQ b General Rules i When demand is inelastic price and total revenue move in the ii When demand is elastic price and total revenue move in iii When demand is unit elastic total revenue remains constant same direction opposite direction when price changes V VI Elasticity and Total Revenue Along a Linear Demand Curve a Slope of linear demand curve is constant but elasticity is not Other Demand Elasticities a Income Elasticity of Demand demanded of a good responds to a change in consumers income measure of how much the quantity i change in QD change in income ii Normal Goods have positive income elasticities iii Inferior Goods have negative income elasticities b Cross Price Elasticity of Demand measure of how much the quantity demanded of one good responds to a change in price of another good 5 i change in QD of
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