Microeconomics Unit 2 Demand, Supply, and Consumer Choice

Microeconomics Unit 2: Demand, Supply, and Consumer Choice Demand The Law of Demand: Inverse relationship between price and quantity demanded Supply The Law of Supply: Direct relationship between price and quantity supplied P↑ Qd __↓_ P↓ Qd __↑_ P↑ Qs _↑__ P↓ Qs _↓__ What is the different between a change in quantity demanded and a change in demand? A change in quantity demanded is movement along the curve due to a change in price. A change in demand is when the entire demand curve shifts left or right due to a change in one of the shifters Changes in Demand and Supply (Shifting the Curve) What changes demand? (5 Shifters of Demand) What changes supply? (5 Shifters of Supply) 1. Tastes and preferences 1. Prices/availability of inputs (resources) 2. Number of consumers 2. Number of producers 3. Price of related goods- Substitutes and complements 3. Technology 4. Income 4. Government action: taxes & subsidies 5. Future expectations 5. Expectations of future profit Substitutes: Complements: Price of A↑ Demand for B __↑_ Price of A↓ Demand for B __↓_ Price of A↑ Demand for B __↓_ Price of A↓ Demand for B __↑_ Normal Goods: Inferior Goods: Equilibrium and Disequilibrium Draw a shortage Draw a surplus S S P2 Pe Pe P1 D Qs Qe Qd D Qd Qe Qs Supply and Demand Practice Demand Decrease Demand Increase Price _↓_ Quantity _↓_ Income ↑ Demand ___↑_ Income ↓ Demand ___↓_ Income ↑ Demand ___↓_ Income ↓ Demand ___↑_ Government Involvement Price Ceiling- Legal cap on prices designed to keep prices artificially low When binding, ceilings go _below__ equilibrium and result in a shortage. Price Floor- Minimum legal price sellers can sell a product When binding, floors go __above_ equilibrium and result in a surplus. Subsidy- Government payment to producers designed to encourage them to produce more Double Shift Practice Price _↑_ Quantity _↑_ If demand increases AND supply increases then price _indeterminate_ and quantity __increases__ Price S A Supply Decrease S1 B Supply Increase Price _↑_ Quantity _↓_ Price _↓_ Quantity _↑_ D D1 Quantity Double Shift Rule: If TWO curves shift at the same time, EITHER price or quantity will be indeterminate. Inelastic Demand Characteristics 1. Necessity 2. Few Substitutes 3. Elasticity coefficient less than 1 D Elastic Demand Total Revenue Test Characteristics Inelastic Demand 1. Luxury Price ↑, TR __↑__ 2. Many Price ↓, TR __↓__ Substitutes D Elastic Demand 3. Elasticity Price ↑, TR __↓__ coefficient Price ↓, TR__↑ __ greater than 1 Elasticity of Demand Coefficient Elasticity of Supply Coefficient EquationEquationPercent change in quantity demanded Percent change in quantity supplied Percent change in price Percent change in price Perfectly Inelastic = 0 Perfectly Inelastic = 0 Relatively Inelastic = Less than 1 Relatively Inelastic = Less than 1 Unit Elastic = 1 Unit Elastic = 1 Relatively Elastic = Greater than 1 Relatively Elastic = Greater than 1 Perfectly Elastic = ∞ Perfectly Elastic = ∞ Cross-Price Elasticity of Demand Income Elasticity of Demand Definition- Shows what happens to one product Definition- Shows what happens to a product when when the price changes for a different product there is a change in income Equation- Percent change in quantity of product A EquationPercent change in quantity Percent change in price of product B Percent change in income Positive: Substitute Negative: Complement Positive Normal good Negative Inferior good Consumer Surplus (CS) and Producer Surplus (PS) Consumer Surplus (CS)- Difference Identify at equilibrium between how much people are willing to 1. CS- ABC pay and the price they do pay 2. PS- EFJ Producer Surplus (PS)- Difference 3. DWL- None between the price and how much the seller Identify when there is is willing to sell the product for a price ceiling at $2 Deadweight Loss (DWL)- Lost efficiency 4. CS- ABE when the optimal quantity is not being 5. PS- J produced 6. DWL- CF Welfare Economics and International Trade The graph shows the domestic market for rice. Identify and calculate the following at equilibrium 1. Consumer surplus- ABC = $300 = ($10 x 60)/2 2. Producer surplus- EFKMU = $240 3. Total surplus- ABCEFKMU= $540 Identify the following if this country buys rice from other countries for $5 4. Quantity produced domestically- 30 units 5. Quantity imported- 60 units = (90 Ð 30) 6. Consumer surplus- ABCEFGJKMNQRT 7. Producer surplus- U Identify if the government places a tariff of $1 8. Consumer surplus- ABCEFGJ 9. Tariff revenue- QR = $40 ($1 x 40 units) 10. Deadweight Loss- NTText Excise Tax Practice Before tax 1. CS before tax: BACD 2. PS before tax: GHFE After Tax 3. Tax per unit: $4 Per Unit 4. CS after tax: B 5. PS after tax: G 6. Dead weight loss: DE 7. Total tax revenue to gov: ACHF 8. Total spending by buyers: ACHFGI 9. Total revenue to sellers: GI 10. Total amount of tax buyer pay: AC 11. Total amount of tax sellers pay: HF 12. Is the demand curve between $12 and $10 elastic, inelastic, or unit elastic? Elastic. Price fell and total revenue went up Consumer Choice and Maximizing Utility Utility Maximizing Rule: Marginal Utility A = Marginal Utility B Price of A Price of B You can choose any combination of two different activities, the movies ($10) or riding go carts 3 2 ($5). 2 1 1. If you only have $25, what combination 1 .4 maximizes your utility? 2 movies and 1 go cart .5 .2 because you pick the one that gives you the most additional utility per dollar until all the 3. What is the total utility from consuming 3 movies money is spent. and 2 go carts? 75 utils = 30+20+10+10+5 2. What combo is best if you have $40? 3 Movies and 2 Go Cart