Micro Econ Midterm 2 PDF

Chapter 4: ---------- **Markets** How **price** is determined **Supply** and **Demand** - - - Basic model Supply: Firms Demand: Consumers What is a **Market?** A group of sellers and buyers of a particular group of goods/service - - Markets can take many forms Highly organized...

Chapter 4: ---------- **Markets** How **price** is determined **Supply** and **Demand** - - - Basic model Supply: Firms Demand: Consumers What is a **Market?** A group of sellers and buyers of a particular group of goods/service - - Markets can take many forms Highly organized: Like many agricultural commodies Less organized: Like a small ice cream shop **Competitive Market:** A market that has so many buyers and sellers so that they do not have an impact on the market price. The price is determined by all buyers and sellers in the market **In this chapter**, it is assumed that all markets are perfectly competitive - - Buyers and sellers are **Price Takers**, people only able to take the current market price and are unable to change it **Monopoly:** One seller in the market and this seller sets the price Other markets fall between perfect competition and monopoly. **Demand** The **Demand Curve:** relationship between price and quantity demanded **Quantity demanded**: amount of good that buyers are willing and able to purchase **Law of demand:** the claim that, other things equal, the quantity demanded of a good falls when the price of a good rises Can be **represented** by: Table Graph Algebra Catherine's individual demand curve Qd = 12 - 2P **Market Demand:** the sum of the demand from all the individuals in the market Nicholas demand curve: qd = 7 - p Total would be them added up: qdmarket = (12 - 2p) + (7 - p) = 19 - 3p, where p = price *What can affect the market demand?* - - - - Income Price of related goods More factors: Tastes Expectations Number of buyers **Movement along demand curve vs Movement OF demand curve** Price of good represents a movement along demand curve, but all the other factors shift the demand curve itself **Supply:** The supply curve: relationship between price and quantity supplied **Quantity supplied:** The amount of good sellers are willing and able to sell **Law of supply:** the claim that, the quantity of supplies rises with price rises **Supply schedule:** a table that shows the relationship between the price of a good and the quantity supplied **Supply curve:** a graph of the relationship between the price of a good and the quantity supplied. It is represented by a positive upwards slope / **Market Supply:** the sum of supplies of all sellers **Factors that shift supply curve:** - - - - **Equilibrium:** a situation in which the price has reached the level where quantity supplied equals quantity demanded P\*: Qs = Qd = Q\* **EQUILIBRIUM PRICE**: the price that balances quantity supplied and quantity demanded **EQUILIBRIUM QUANTITY**: the quantity supplied and the quantity demanded at the equilibrium price When quantity supplied is greater than quantity demanded, there is a **surplus** When quantity demanded is greater than quantity supplied, there is a **shortage** In an economic system, scarce resources have to be allocated among competing uses - Supply and demand together determine the prices of the economies many different goods and services - Chapter 5 Elasticity Demand --------------------------- **Elasticity:** a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants - - - - 1. 2. 3. 4. 5. 6. Point A: Price = \$4 Quantity = 120 Point B: Price = \$6 Quantity = 80 **Midpoint method** Price elasticity of demand = [(Q2 - Q1)/\[(Q2 + Q1)/2\]] (P2-P1)/\[(P2+P1)/2\] **Variety of demand curves** **Demand curves** are classified according to their **Elasticity** - - - If elasticity equals 0 = perfectly inelastic, no matter what the price is, demand is still the same If elasticity is infinite = perfectly elastic, at a certain price, demand is infinite **Total revenue:** is the amount paid by buyers and received by sellers of a good TR = P x Q When demand is inelastic, price and TR move in the same direction When demand is elastic, price and TR move in opposite directions When demand is unit elastic, TR remains constant when price changes 🔺TR = (P+🔺P)(Q+🔺Q) - P x Q **Other demand elasticities** In addition to the price elasticity of demand ***Income elasticity of demand** = [Percentage change in Qd]* ***Cross price elasticity of demand** = [% Change in Qd of good 1]* *% Change in Price of good 2\ * When income elasticity of demand is \< 0, inferior, because as peoples income rises, their demand for this good decreases. **E.g. margarine** When income elasticity of demand is \> 0, normal good, because as peoples income rises, their demand increases. **E.g. sports cars** When cross price elasticity of demand \> 0, the goods are substitutes, because increase of price of good 2 increases demand of good 1 **e.g. coffee and tea** When cross price elasticity of demand \< 0, goods are compliments, because increase of price of good 2 will lower quantity demand of good 1. **E.g. peanut butter and jelly** Q1: John income went from 20k to 22k, his Qd of burgers went from 20 to 10 1. -67%/21% = -7 elasticity **USE MIDPOINT METHOD. CHANGE/AVERAGE** 2. Q2: P shrimp went from \$4 to \$6, whole Q steak went from 80 to 95 1. 2. Week 6 - YAPPING **Chapter 6** **Government policies** - - **Controls on pricing** - Binding - Leads to a **shortage** **Price Floor** - - **Principle 5:** Markets are usually a good way to organize economic activity - - - - **Taxes** **Tax incidence** is the manner in which the burden of a tax is shared among participants in a market **2 scenarios** 1. 2. Pd = Ps + 15 Ps = Pd - 15 Pd - Ps = 15, That\'s why buyer tax burden will be higher most of the time. **How burden of tax is divided** Elastic supply, Inelastic demand: **Buyers pay more** Inelastic supply, elastic demand: **Sellers pay more**