Econ Midterm Review PDF

**[ECON MIDTERM REVIEW:]** **Consumer theory:** - Consumer choice model on given prices - With income (budget constraint) and preference (utility function) what amount of two good will we buy? If price and income changes, then what will be buy? - **Optimum poin...

**[ECON MIDTERM REVIEW:]** **Consumer theory:** - Consumer choice model on given prices - With income (budget constraint) and preference (utility function) what amount of two good will we buy? If price and income changes, then what will be buy? - **Optimum point:** where budget constraint and indifference curve meet -- here all income is spent! - **Utility:** what makes me happy, what do I like? - UTLITY INCREASES AS WE CONSUME MORE QUANTITY. I am happier the more I buy! - Measured in **utils** - **Indifference curves:** what do I like/want at a specific level of utility? - Above the utility curve -- we like it more, its preferred, below we like it less, and any bundle on a curve, we like it the same amount We can rank what we like, different curves produce diff U value, we like the highest U the most! **Individual Demand Function** A change in the price of one good, or new income, changes the optimal choice At a price of \$8 per case, we can ger 2 cases per month At \$4 we can get 4 cases per month **Market Demand Function** - Demand curve, supply curve when they meet = market equilibrium - Theory of firms: firms create the supply function of the market. What do firms want to sell at each price? - V.s Consumer theory: what do consumers want to buy at each price? Consumers create the demand function of the market. - Together = demand and supply Change in quantity demanded v.s change in demand - Demand curve can shift - Increase in demand, a shift right Change in supply v.s change in quantity supplied - Supply curve can shift - Increase in supply, with a shift right Shifts = change in movement up or down - A pivot in the demand curve -- change in slope - Show small or large change in quantity demand in response to a change in the price - Supply curve can pivot/change slow to show small or large changes in quantity supplied in response to change in price - Elastic = big change, horizontal change - Inelastic = small change, vertical change **What are market failures?** - Depart from the efficiency of a perfectly competitive market - Price and quantity regulations - Taxes and subsidies - Externalities - Public goods and common resources - Monopoly - High transaction costs **Cost benefit analysis** - Evaluate whether public sector project or policy will enhance of diminish social well being - For example: adding a ferry or tunnel - Open a hospital benefits seen much later - High widening? save time, lives? Economics measure the following: - What are the costs and benefits. - How to measure the costs and benefits. - Timing of costs and benefits and their aggregation. - How to use the information to make decisions and what are the implications on society? For instance, Net Present Value Formula: \ [\$\$NPV = \\left( B\_{0} - C\_{0} \\right) + \\ \\frac{\\left( B\_{1} - C\_{1} \\right)}{1 + i} + \\frac{\\left( B\_{2} - C\_{2} \\right)}{\\left( 1 + i \\right)\^{2}} + \\ldots + \\frac{\\left( B\_{T} - C\_{T} \\right)}{\\left( 1 + i \\right)\^{T}}\$\$]{.math.display}\ **Data for Assessment** - Time horizon of the project, denoted by T. - Stream of benefits [{*B*~0~, *B*~1~, *B*~2~, ..., *B*~*T*~}]{.math.inline} where [*B*~*t*~]{.math.inline} is the benefit in year [*t*.]{.math.inline} - Stream of costs [{*C*~0~, *C*~1~, *C*~2~, ..., *C*~*T*~}]{.math.inline} where [*C*~*t*~]{.math.inline} is the costs in year [*t*.]{.math.inline} - Net benefits to a project in year [*t*]{.math.inline} as [*B*~*t*~ − *C*~*t*~]{.math.inline}. - Discount rate, [*i*]{.math.inline}, assumed constant over the life of a project. **Budget constraints:** - Unlimited wants, but scarce resources - We wish to -- satisfy unlimited wants while constrained by available resources. - How does the individual make choices faced with scared resources aka money? - Utility maximization, subject to the budget constraint and spending all income to make optimal choice. - Assume consumers are rational - Make self as happy as possible subject to scare money - Reach the highest indifference curve where utility is highest level subject to our money constraint and spending all of our money! - Bundles on a constraint of two goods - Along the budget constraint = affordable and spend all income - You get diff combos of the two goods that will cost you the same amount of money on diff points of the constraint. Many bundles exist in the graph, but only a set are affordable and spend all income. Below the budget line/inside are affordable but don't spend all income Above/outside the line are unaffordable. - On the budget line = affordable, possible ways to spend ALL income - We don't want a deficit or a surplus, we will force the consumer to spend all monies - Budget = price of good x quantity of each good purchased **Budget Constraint Equation:** Given our income, [*m*]{.math.inline}, and price of good 1, [*P*~1~]{.math.inline}, and price of good 2, [*P*~2~]{.math.inline}, Expenditure = Income [**P**~**1**~**X**~**1**~**+P**~**2**~**X**~**2**~ **=** **m**]{.math.inline} [*P*~1~]{.math.inline} - price of good 1 [*X*~1~]{.math.inline} - quantity of good 1 [*P*~2~]{.math.inline} - price of good 2 [*X*~2~]{.math.inline} - quantity of good 2 [*m*]{.math.inline} - income How does budget constraint change as a result of change in price? - It pivots A fall in price of the good y/vertical axis - Budget constraint becomes more flat - Pivot down along Y axis Fall in the price of good y/vertical axis - Budget constraint becomes MORE steep ( increase in slope) - Pivot up along the Y axis Rise in price of good X/horizontal axis - Budget constrain becomes more steep - Pivot's left along the x axis Fall in price of good x horizontal axis - Budget constraint becomes more flat - Pivots right along the x axis If asked to Compute and show where the budget constraint crosses the y-axis and x-axis, horizontal and vertical intercept. - Then, use this formula - For X intercept [\$\\frac{m}{p\_{1}} = \\frac{m}{p\_{v}}\$]{.math.inline} - *For Y intercept:* [\$\\frac{m}{p\_{2}} = \\frac{m}{p\_{c}}\$]{.math.inline} - If you increase the price of good 2, the intercept for X stays the same, the Y axis will change to a pivot down the Y axis, slope will become flatter. Y intercept changes. - If you decrease the price of good 2, the X intercept stays the same, Y axis will change to a pivot up the Y axis, slope becomes steeper, Y intercept changes. - If you increase the price of good 1, the Y intercept stays the same, the X axis will pivot left, slope becomes flatter, X intercept changes (decrease) - If you decrease the price of good 1, Y intercept stays the same, X axis pivots right, slope becomes steeper, X intercept changes (increases) **What if we change the income (m value)?** - The budget constraint shifts - Increase in income = shift right/outward, parallel shift - Decrease in income = shift left/inward, parallel shift - Change in BOTH X and Y intercept, (increases for income increase, decrease for income decrease) Recall the Budget Line: [*P*~1~*X*~1~ + *P*~2~*X*~2~ = *m*]{.math.inline} (1) Rearranged: [\$X\_{1} = \\frac{m}{P\_{1}} - \\frac{P\_{2}}{P\_{1}}X\_{2}\$]{.math.inline} (2) Equation (2) is equation (1) expressed in a different format\*. [\$- \\frac{P\_{2}}{P\_{1}}\$]{.math.inline} is the slope of the budget line and [\$\\frac{P\_{2}}{P\_{1}}\\ \$]{.math.inline} is the [relative price]. **Real income** - Interpret [\$\\frac{m}{P\_{2}}\$]{.math.inline} - *Income in "real" terms is adjusted for prices.* - If we spent all our money on good 2, equals the quantity of good 2 we can buy **Relative price** - Compares the price of one good to another using a fraction - In consumer theory, the choice we make between the two goods are **TRADE OFFS** of buying ONE or the other Interpret [\$\\frac{P\_{2}}{P\_{1}}\$]{.math.inline} - The amount of good 2 in terms of good 1 Interpret [\$\\frac{P\_{1}}{P\_{2}}\$]{.math.inline} - The amount of good 1 in terms of good 2 **Opportunity Cost in consumer theory** - Value of the next best alternatives forgone -- due to some action or taking some choice - Next best alternative forgone to choosing one good, is the other good - AKA: THE ONLY ALTERNATIVE TO GOOD 1, IS THE ALTERNATIVE GOOD (GOOD 2) in consumer theory scenario - We do this all the time, do I buy two jeans or one shirt? School attendance or sleep? - The choice we make for a good, comes at the cost of NOT getting the other - Opportunity cost of good 2 - Opportunity cost of good 2 in terms of good 1 forgone - Opportunity cost of good 1 - Opportunity cost of good 1 in terms of good 2 forgone **[Utility Function and Indifference Curves ]** - Maximize utility subject to a budget constraint - Make us as happy as possible, subject to what we can exactly afford and spend, given price and income - Budget constraint = set of bundles we can afford - Preference = what makes us happy - Budget line = what is possible and preferences determine what is chosen **Goals on consumer theory** - Given the price and income, find consumers optimal bunder/choice with knowledge of their preference - Derive individuals demand curve from an account of how consumers make their buying plans - Derived the market curve, as sum of individual consumer and demand curve **Utility** - X axis total quantity consumed - Y axis Utility \# in utils - Benefit or satisfaction experiences from consuming a bunder - Unit of analysis can be an individual, household, student etc - Utility increases as goods increase / consumed - Captures preferences -- describes likes/preferences for goods in math equation - Individuals must tell/show their utility - Cant be looked up - [*u*= *x*~1~^*a*^*x*~2~^*b*^]{.math.inline} - [\$a\\ and\\ b\\ are\\ constants,\\ both\\ are\\ between\\ 0\\ and\\ 1\\ and\\ add\\ to\\ 1\\ AKA\\ its\\frac{1}{\\ 2}\$]{.math.inline} - *Total utility will pass through the origin on a graph* If an individual receives level of 6 utils from consuming 10 apples, and 2 utils from consuming 1 apple, can we say that consuming 10 apples is 3x better? - No! **ranking is ordinal, not cardinal**. We can **only say** consuming 10 apples is better than consuming 1! **Utility question example:** Suppose a bundle of [*x*~1~ = 4]{.math.inline} and [*x*~2~ = 2]{.math.inline}, then compute utility? [\$u = \\ x\_{1}\^{\\frac{1}{2}}x\_{2}\^{\\frac{1}{2}}\$]{.math.inline} [\$u = \\left( 4 \\right)\^{\\frac{1}{2}}\$]{.math.inline} [\$\\left( 2 \\right)\^{\\frac{1}{2}}\\ \\ \\ \\ \\ or\\ \\ \\ \\ u = 4\^{0.5}2\^{0.5}\$]{.math.inline} [*u* = (2)(1.41) = 2.82    *or*   *u* = (2)(1.41) = 2.82]{.math.inline} - Suppose a bundle of [*x*~1~ = 3]{.math.inline} and [*x*~2~ = 4]{.math.inline}, then compute utility and compare to example 1? [\$u = \\ x\_{1}\^{\\frac{1}{2}}x\_{2}\^{\\frac{1}{2}}\$]{.math.inline} [\$u = \\left( 3 \\right)\^{\\frac{1}{2}}\$]{.math.inline} [\$\\left( 4 \\right)\^{\\frac{1}{2}}\\ \\ \\ \\ or\\ \\ u = \\left( 3 \\right)\^{0.5}\\mathrm{\\ }\\left( 4 \\right)\^{0.5}\$]{.math.inline} [*u* = (1.73)(2) = 3.46    *or*   *u* = (1.73)(2) = 3.46]{.math.inline} - From consumption bundle [*x*~1~ = 3]{.math.inline} and [*x*~2~ = 4]{.math.inline}, the individual receives 3.46 utils and enjoys this bundle better than bundle [*x*~1~ = 4]{.math.inline} and [*x*~2~ = 2]{.math.inline} because they receive higher level of utility as the amount of utils are larger. **TOTAL UTILITY V.S MARGINAL UTILITY** **Total utility (U) OR (TU)** - The total benefit the consumer gets from the consumption of goods - Always increasing **Marginal utility (MU)** - The change in total utility, results from one-unit increase in the quantity of good consumed -- quantity of other good remains constant - Additional satisfaction gained from **consuming ONE MORE** unit of a good. - Always decreasing with an additional unit of consumption - Inverse relationship with quantity consumption **Quantity increases, MU decreases.** Quantity decreases, MU increases **Principle of diminishing marginal utility** - As consume more goods, total utility increases, BUT MU decreases - MU is positive but diminishes as quantity of good consumes increases - MU gets smaller and smaller as we increase consumption. **Indifference curve** - Shows combo of goods along which a consumer is different between the combo of goods - **Any bundle along IC line, consumers achieve same level of utility** - At this line, utility function is set to a constant, U, and is all the bundles which achieve u [\$\\overline{u} = \\ x\_{1}\^{a}x\_{2}\^{b}\$]{.math.inline} There's three types of indifference curves, what are they? **Indifference curves** - Any IC more upwards/right direction has bundles with higher level of utility - IC located down/left, has lower levels of utility - Can be sorted into three groups, - Preferred - Not preferred - Indifferent - We like the highest utility the most Suppose utility is set at [\$\\overline{u} =\$]{.math.inline} 100 [\$u = \\ x\_{1}\^{\\frac{1}{2}}x\_{2}\^{\\frac{1}{2}}\$]{.math.inline} [\$\\overline{u} = x\_{1}\^{\\frac{1}{2}}x\_{2}\^{\\frac{1}{2}}\$]{.math.inline} = 100 - All the combinations of [*x*~1~]{.math.inline} and [*x*~2~]{.math.inline} that compute to a utility of 100 will be on the same IC. Suppose utility is set a [\$\\overline{u} =\$]{.math.inline} 100 [\$\\overline{u} = x\_{1}\^{\\frac{1}{2}}x\_{2}\^{\\frac{1}{2}}\$]{.math.inline} = 100 [\$\\overline{u} = \\left( 25 \\right)\^{\\frac{1}{2}}\$]{.math.inline} [\$\\left( 400 \\right)\^{\\frac{1}{2}}\$]{.math.inline} = 100 [\$\\overline{u} = \\left( 5 \\right)\\left( 20 \\right)\$]{.math.inline} = 100 Consumption of the bundle [*x*~1~ = 25]{.math.inline} and [*x*~2~ = 400]{.math.inline} achieves a level of utility of 100 utils. [\$\\overline{u} = \\left( 16 \\right)\^{\\frac{1}{2}}\$]{.math.inline} [\$\\left( 625 \\right)\^{\\frac{1}{2}}\$]{.math.inline} =100 [\$\\overline{u} = \\left( 4 \\right)\\left( 25 \\right)\$]{.math.inline} =100 Consumption of the bundle [*x*~1~ = 16]{.math.inline} and [*x*~2~ = 625]{.math.inline} achieves a level of utility of 100 utils. - Both [*x*~1~ = 25]{.math.inline} and [*x*~2~ = 400]{.math.inline} and [*x*~1~ = 16]{.math.inline} and [*x*~2~ = 625]{.math.inline} achieve a level of 100 utils and so these bundles must be located on the same IC. **Marginal Rate of Substitution** - **The rate a person will give up good y to get an additional unit of good x**, while remaining indifferent AKA -- how much a consumer will give up in order to get an additional unit of the other good, while keeping the same level of utility/satisfaction - It's a trade off between two goods. - If the indifference curve is steep - MRS = high - Person is willing to give up a lot of good Y to get an additional unit of X while remaining satisfied - This means they don't have much of good X - If the indifference curve is flat - MRS is low, the person is only willing to give up a small amount of Y to get an additional unit of X - They don't have a lot of good Y  **Steep Curve**: High willingness to trade Y for X (high MRS) → Little X, strong preference for X **Flat Curve**: Low willingness to trade Y for X (low MRS) → More Y, weaker preference for X **[Diminishing MRS]** - In sum as we move down and to the right along the IC, a person is willing to give up less of good y to get one more unit of good x while at the same time remaining indifferent (on the same IC) as the quantity of x increases. - Shape of a person's IC incorporates the principle of diminishing MRS because the curves are bowed toward the origin. **[Optimum]** - Consumers optimal choice allocate all income in to maximize total utility given prices of goods while spending all income. - Total utility is maximized when? - MRS = to price ratio or equalize the marginal utility per dollar for all goods - Spend all income. - Marginal utility per dollar - Marginal utility from a good that results from spending one more dollar on it - Comparing MU per dollar from the goods that a person buys, we can determine the budget has been allocated in the way that maximized total utility *Marginal utility per dollar*: [\$\\frac{\\text{MU}\_{1}}{P\_{1}}\$]{.math.inline} marginal utility per dollar from good 1 [\$\\frac{\\text{MU}\_{2}}{P\_{2}}\$]{.math.inline} marginal utility per dollar from good *2* At the optimum bundle, [\$\\frac{\\text{MU}\_{1}}{P\_{1}}\$]{.math.inline} = [\$\\frac{\\text{MU}\_{2}}{P\_{2}}\$]{.math.inline} *marginal utility per dollar of goods are equal.* If [\$\\frac{\\text{MU}\_{1}}{P\_{1}} \> \\frac{\\text{MU}\_{2}}{P\_{2}}\$]{.math.inline} Then increase consumption of good 1, marginal utility will decrease. Increase consumption of good 1 to the point where marginal utilities per dollar are equal [\$\\frac{\\text{MU}\_{1}}{P\_{1}} = \\frac{\\text{MU}\_{2}}{P\_{2}}\$]{.math.inline}. If [\$\\frac{\\text{MU}\_{1}}{P\_{1}} \< \\frac{\\text{MU}\_{2}}{P\_{2}}\$]{.math.inline} Then increase consumption of good 2, marginal utility will decrease. Increase consumption of good 2 to the point where marginal utilities per dollar are equal [\$\\frac{\\text{MU}\_{1}}{P\_{1}} = \\frac{\\text{MU}\_{2}}{P\_{2}}\$]{.math.inline}. [ ]  **[Optimum to individuals ]** A consumer's demand curve traces out the quantities that maximize utility constrained by the budget at each price, with all other influences remaining the same. Let's look at a change in Price of bananas!  **[SUPPLY AND DEMAND]** - P\* = at this intersection, we find **equilibrium market price**, price where quantity demanded by consumers = the quantity supplied by producer - Q\* = **market equilibrium quantity**, amount of good or service sold and purchased at equilibrium price - **Point of intersection = market equilibrium**, demand and supply are balanced leading to stable price and quantity of goods. Market operates with **no surplus or shortage**. - **Market Demand**: Represents the total quantity of a good or service that consumers are willing and able to purchase at various prices. Generally, as prices decrease, demand increases. - **Market Supply**: Represents the total quantity of a good or service that producers are willing and able to sell at various prices. Typically, as prices increase, supply increases. - **Market Clears**: The term \"market clears\" means that there are no excess supplies or shortages at this equilibrium point. At price P\* every unit of the good that is produced is sold, and every consumer who wants to buy the good at that price can do so. - **Unique Combination**: The equilibrium price and quantity combination (P\*, Q\*) is unique in a given market context, meaning that there is only one price and quantity where supply and demand are balanced. **Individual demand** - Relationship between price of a good and quantity demanded by ONE person **Market demand curve** - Created from horizontal summation of individuals' demand curves - Sums the quantity demanded at each price  **Demand curve** - Controlled by consumers - Relationship between the price of a good demanded and quantity demanded by consumers - Downward facing, negative slope, straight line demand curve typically slopes downward from left to right, reflecting the law of demand: as the price decreases, the quantity demanded increases, and vice versa. - For instance, the equation for demand could look like, - [*P*~*D*~ = 50 − 2*Q*~*D*~]{.math.inline} - [*P*~*D*~ = 30 − 5*Q*~*D*~]{.math.inline} Sometimes the *D* subscript for "Demand" is dropped, - [*P* = 20 − 0.5*Q*]{.math.inline} - [*P* = 10 − 4*Q*]{.math.inline} **Law of demand** - Higher the price of a good, smaller the quantity is demanded. - Lower the price of a good the greater the quantity is demanded. **Willingness to Pay (WTP)** - Refers to the **maximum amount of money a consumer is willing to spend to acquire a good** or service. It reflects the perceived value of that good or service to the consumer and is influenced by several factors **Marginal Benefit** - Benefit received from **[one more]** unit of consumption. - If a small quantity is available, highest price on is willing to pay is relatively high. - As the quantity available increases the most someone is willing to pay decreases along the demand curve - Downward sloping curve - Marginal benefit decreases as more units of the good are consumed due to law of diminishing marginal utility -- where as a person consumes more of a good, their additional satisfaction decreases from each additional unit. For example, the first slice of pizza might provide a lot of satisfaction, but the fifth or sixth slice may provide much less. - MB has a negative relationship with quantity demanded  **Supply Curve** - Firms act in their own interest and profit maximizes. - Relationship between the price of a good and the quantity supplied by one producer is called: individual supply. How is the supply curve created? **Marginal cost** - Change in a firm's total cost from when increasing supply by one unit - Minimum price that producers must receive to induce them to offer one more unit of a good or service for sale, minimum supply-price **Supply Curve** - Firm's side of the market making supply decisions - Relationship between price supplied and quantity supplied by firms - Upward facing/upward slope/positive slope and is a straight line - Marginal cost curve **General form of the supply equation:** [*Q*~*S*~]{.math.inline} *= a + b*[*P*~*s*~]{.math.inline} Where... - [*Q*~*S*~]{.math.inline} *is quantity supplies* - [*P*~*s*~]{.math.inline} *is price of good supplied* - [*a*]{.math.inline} *= intercept (quantity supplied when price is zero)* - B = slope of the supply curve (how much the quantity changes in response to change in price) - **Positive Slope**: The slope B is typically positive, meaning that as the price of the good increases, the quantity supplied also increases. This reflects the law of supply. - **Intercept**: The intercept a represents the quantity supplied when the price is zero. While this is often not practical in real-world situations, it provides a baseline for the supply curve. Equation for supply could look like, [*Q*~*S*~ = 4*P*~*s*~]{.math.inline} [*P*~*s*~ = 30 + 5*Q*~*s*~]{.math.inline} Sometimes the *S* subscript for "Supply" is dropped, [*P* = 10 + 2*Q*]{.math.inline} [*Q* = 4*P*]{.math.inline} **General form of demand equation:** Qd = a -- BPd Where: - Qd = Quantity demanded - Pd = Price of the good - a = Intercept (the quantity demanded when the price is zero) - b = Slope of the demand curve (indicating how much the quantity demanded changes in response to a change in price) **Law of supply** - Higher the price of a good the greater is the quantity supplied, and the lower the price of a good, the smaller the quantity supplied. - Profit motivated, higher prices = greater profit - Cost of production: production increases, cost can rise, producers charge higher prices to cover the cost - Compare price and quantity pairs at point a v.s point b - As the price increased from \$16 to \$18 at point a to point b, quantity supplied by the market increased from 3 to 4. The converse is true from point b to point a.   **[Supply and demand]** - Equilibrium in a market when **Qd = Qs** - Occurs when the price balances both buying plans (represented by demand curve, shows quantity of good a consumer is willing to buy at various price) and selling plans (represented by supply curve, shows quantity the produce willing to sell at various price) AKA, quantity demanded by consumers = quantity supplied by producers at certain price - This balance = no surplus (excess supply) and no shortage (excess demand) - Neither buyer nor sellers can do business better than when the quantity demanded and quantity supplied are equal - How is this equilibrium driven? Self interested behaviour, consumers seeking the best deal, producers seeking the best profit. **Efficient outcome** - Buyers pay the highest price they are willing to pay for the last unit bought (marginal benefit) and sellers receive the lowest price they are willing to supply for the last unit sold (marginal cost) - Marginal benefit of consumption is = to the marginal cost of supply the good - MB = MC **Marginal Cost of Supplying the Good**: This is the additional cost incurred from producing one more unit of the good. **What is a perfectly competitive market?** 1. Many firms sell identical products to many buyers aka, no single firm selling a product, so no single firm can influence market price 2. No restrictions to entry into the market 3. Established firms have no advantage over new ones equal playing field 4. Sellers and buyers are well informed about prices and are "price takers" price takers means accepting the market price as given, can't influence it.  If there is a surplus in the market, aka supply greater than the demand, then QD \< Qs, then the market price must decrease to clear the market If there is a shortage in the market, aka QD\>QS... the demand is greater than the supply, then the market price must increase to clear the market **[Demand Curve Elasticity]**  **[Supply curve elasticity]**  **[A shift in demand]** **Change in Quantity demanded** - Movement along the curve due to a change in price of the good, other factors remain constant - Movement along same demand curve - If price decreases from p1 to p2, quantity demanded increases from Q1 to Q2 - Caused by change in the price of a good - Ex: price decreases quantity demanded increases **Change in Demand** - Shift of ENTIRE demand curve - Caused by factors other than price, income, preference etc - Ex: increase in consumer income demand increases - If demand increases due to higher income, the ENTIRE demand curve shifts to the right from D1 to D2 **An increase in demand** - When demand increases, demand curve shifts RIGHT, P and Q are increased - An increase in demand creates a shortage of the original price, to decrease the shortage we must increase the price - In the graph, the equilibrium price rises to \$2.50 from previous \$1.50, and to 15 million bars per week - An increase in the quantity supplied, but NO change in the supply, so movement along the supply curve occurs, but NO shift. **Factors that cause an increase in demand** - Income - Increasing income so we can afford more things - Price of goods - A substitute price of good rises, or compliment price drops - Expected rise in future prices - Given storage available, lets buy more before it gets expensive - Preference - Suddenly consumers prefer one item/good more **A decrease in demand** - When demand decreases, it shifts left, P and Q decrease - The decrease in demands would create a surplus at the original price, to eliminate this, the price must FALL - In the graph, equilibrium falls from \$1.5 to \$1.25, and 8 million bars a week from 10 million - There is a decrease in quantity supplied, but NO change in the supply, so there is movement along the supply curve to account for the shift of demand, but NO shift of the supply **Factors that cause a decrease in demand** - Income - Decreased income, now we cant afford as much brokie status - Price or related good - Substitute item price falls, compliment price rises - Expected future prices falling - Itll be on sale so I will buy it in the future, not now - Preference - Suddenly we consumers don't like this product any more **A change in quantity supplied** - Movement along the same curve - Caused by a change in price of the good - Ex: price increases quantity of supplied increases - Price decreases quantity supplied decreases - If the price of a good increases, producers want to supply more of it, leading to increase of quantity supplied - If price of product rises from p1 to p2, quantity supplied will increase from Q1 to Q2 **A change in supply** - Shift of entire supply curve - Caused by factors other than price -- production, technology, wages - Ex: decrease in production cost supply increases (right shift) - Rightward shift = increase in supply - Leftward shift = decrease in supply **An increase in Supply** - When supply increases, shifts right, P decreases, Q increases - Increase in supply creates a surplus at the original price, to eliminate it price must fall - In the graph, equilibrium price falls to \$1.50 and energy bars are at 15 million per week - Increase in quantity demanded, but no change in the demand **A decrease in supply** - Supply decreases, shifts left, P increases, Q decreases - Decrease In supply creates a shortage at original price, to eliminate this, price must RISE - In the graph, equilibrium increases to \$3.5 per energy bar, and 7 million per week - Decrease in quantity demanded but no change in demand **Factors that cause an increase in supply** - Price of inputs in the production process - Lower costs incurred for the producer/firm - Technology - Improvement in the use of inputs in the production process - State of nature/weather - **Favourable conditions** **Factors that cause a decrease in supply** - Price of inputs in the production process - Higher costs incurred for producer/firm - Technology - Difficulties in the use of inputs in production process - Weather/nature - Unfavourable conditions