Download Normal(good:$A$good$for$which$the$demand$increases$as

Normal(good:$A$good$for$which$the$demand$increases$as$income$rises$and$decreases$as$income$falls$
Inferior(good:$A$good$for$which$the$demand$increases$as$income$falls$and$decreases$as$income$rises$
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Prices$of$related$goods!
Substitutes:(Goods$or$services$that$can$be$used$for$the$same$or$similar$purpose$
Complements:(Goods$and$services$that$are$used$together$
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Tastes$(eg$seasons,$trends/$fashion)(
Population$and$demographics!
Demographics:(Changes$in$the$characteristics$of$a$population$with$respect$to$age,$race$and$gender.$
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Expected$future$prices.!
If$ consumers$ expect$ prices$ to$ increase$ in$ the$ future,$ they$ have$ an$ incentive$ to$ increase$ purchases$
now,$and$vice$versa.$
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An( increase$in$income$will$shift$the$demand$curve$right$because$consumers$spend$more$of$
their$higher$income$on$the$good$(if$it$is$a$normal$good)$
An$increase$in$income$will$shift$demand$curve$left$as$they$spend$less$of$their$higher$income$
on$the$good$(if$the$good$is$inferior)$
An$increase$in$the$price$of$a$substitute$shifts$the$demand$curve$right$as$consumers$buy$less$
of$the$substitute$good$and$more$of$this$good$
An$Increase$in$the$price$of$a$complementary$good$shift$the$demand$curve$left$as$consumers$
buy$less$of$the$complementary$good$and$less$of$this$good$
An$ increase$ in$ taste$ for$ the$ good$ shifts$ the$ demand$ curve$ right$ because$ consumers$ are$
willing$to$buy$a$larger$quantity$of$the$good$at$every$price$
Increase$ in$ population$ will$ result$ in$ a$ shift$ to$ the$ right$ as$ additional$ customers$ result$ in$
greater$quantity$demanded$at$every$price$
Increase$ in$ the$ expected$ price$ of$ the$ good$ in$ future$ will$ shift$ the$ demand$ curve$ right$ as$
consumers$buy$more$of$the$good$today$to$avoid$the$price$in$the$future.$
Quantity( supplied:( The$ amount$ of$ a$ good$ or$ service$ that$ a$ firm$ is$ willing$ and$ able$ to$ supply$ at$ a$
given$price$
Supply(schedule:(A$table$showing$the$relationship$between$the$price$of$a$product$and$the$quantity$
of$the$product$supplied.$
Supply(curve:(A$curve$that$shows$the$relationship$between$the$price$of$a$product$and$the$quantity$
of$the$product$supplied.$
Market(supply:(The$supply$by$all$the$firms$of$a$given$good$or$service$
The(law(of(supply:(Holding$everything$else$constant,$an$increase$in$the$price$of$a$product$causes$an$
increase$ in$ the$ quantity$ supplied,$ and$ a$ decrease$ in$ the$ price$ of$ a$ product$ causes$ a$ decrease$ in$
quantity$supplied.$
Determinants(of(Supply(
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Price$of$inputs$
Technological$change$
Prices$of$substitutes$in$production$
Number$of$firms$in$the$market$
Expected$future$prices$
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Prices$of$inputs$
An$input$is$anything$used$in$the$production$of$a$good$or$service.$An$increase$in$the$cost$of$an$input$
increases$the$cost$of$production.$The$firm$supplies$less$
A$decrease$in$the$cost$of$an$input$decreases$the$cost$of$production$at$every$price.$The$firm$supplies$
more$at$every$price.$
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Technological$change$
A$ change$ in$ the$ ability$ of$ a$ firm$ to$ produce$ output$ with$ a$ given$ quantity$ of$ inputs.$ Technological$
change$allows$the$firm$to$produce$more$outputs$with$the$same$amount$of$inputs$
Productivity:$The$output$produced$per$unit$of$input.$
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Prices$of$substitutes$in$production$
Substitutes$in$production$are$alternative$products$a$firm$can$produce$with$the$same$resources$
An$increase$in$the$price$of$a$substitute$in$production$decreases$the$supply$of$the$initial$good,$while$a$
decrease$in$the$price$of$a$substitute$in$production$increases$the$supply$of$the$initial$good.$
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Number$of$firms$in$the$market$
When$new$firms$enter$the$market,$supply$increases.$When$firms$exit$the$market,$supply$decreases.$
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Expected$future$prices$
If$firms$expect$the$price$of$its$product$will$increase$in$the$future,$they$have$an$incentive$to$decrease(
supply$now.$
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An$increase$in$the$price$of$an$input$shift$the$supply$curve$left$because$the$cost$of$producing$
the$good$rise$
An$increase$in$productivity$shifts$the$supply$curve$right$because$the$costs$of$producing$the$
good$fall$
An$increase$in$the$price$of$a$substitute$in$production$shifts$the$supply$curve$left$as$more$of$
the$substitute$is$produced$and$less$of$the$good$is$produced$
An$ increase$ in$ the$ number$ of$ firms$ in$ the$ market$ $ shifts$ the$ supply$ curve$ right$ because$
additional$firms$result$in$a$greater$quantity$supplied$at$every$price$
An$increase(in$the$expected$future$price$of$the$product$shifts$the$supply$curve$left$because$
less$of$the$good$will$be$offered$for$sale$today$to$take$advantage$of$the$higher$price$in$the$
future.$
The$midpoint$formula$(above)$is$used$so$that$the$value$of$the$price$elasticity$of$demand$between$the$
same$two$points$is$the$same$whether$the$price$increases$or$decreases.$
Perfectly( inelastic( demand:$ Demand$ is$ perfectly$ inelastic$ when$ a$ change$ in$ price$ results$ in$ no$
change$in$quantity$demanded$
Perfectly( elastic( demand:$ Demand$ is$ perfect$ elastic$ when$ a$ change$ in$ price$ results$ in$ an$ infinite$
change$in$the$quantity$demanded.$
Determinants(of(the(price(elasticity(of(demand(
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Availability$of$close$substitutes$
The$length$of$time$involved$
Luxuries$versus$necessities$
Definition$of$the$market$
Share$of$expenditure$on$the$good$in$the$consumer’s$budget$
Total( Revenue:$ Total$ amount$ of$ funds$ received$ by$ a$ seller$ of$ a$ good$ or$ service.$ It$ is$ found$ by$
multiplying$price$per$unit$by$the$number$of$units$sold.$$
I.E.$TR!=!Q*P!
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A$decrease$in$price$leads$to$a$decrease$in$total$revenue$
An$increase$in$price$leads$to$an$increase$in$total$revenue$
When$demand$is$price$elastic:$
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A$decrease$in$price$leads$to$an$increase$in$total$revenue$
An$increase$in$price$leads$to$a$decrease$in$total$revenue$
CrossUprice( elasticity( of( demand:$ The$ percentage$ change$ in$ the$ quantity$ demanded$ o$ one$ good$
divided$by$the$percentage$change$in$the$price$of$another$good$
Cross!price!elasticity!of!demand!=!!
Percentage$change$in$quantity$demanded/$Percentage$change$in$price$of$a$related$good$
Cross$price$elasticity$will$be$positive$when$the$two$goods$are$substitutes$in$consumption$
Cross$price$elasticity$will$be$negative$when$the$two$goods$are$complements$in$consumption$
Income(elasticity(of(demand:(A$measure$of$the$responsiveness$of$quantity$demanded$to$a$change$in$
income.$It$is$measured$by$the$percentage$change$in$quantity$demanded$divided$by$the$percentage$
change$in$income$(disposable$income).$
Income!elasticity!of!demand!=$$
Percentage$change$in$quantity$demanded/$Percentage$change$in$income$
$If$income$elasticity$of$demand$is$positive$but$less$than$1,$it$is$normal$and$a$necessity$
$If$income$elasticity$of$demand$is$positive$but$greater$than$1,$it$is$normal$and$a$luxury.$
$If$income$elasticity$of$demand$is$negative$it$is$inferior.$
Price( elasticity( of( supply:$ The$ responsiveness$ of$ the$ quantity$ supplied$ to$ change$ in$ price.$ It$ is$
measured$by$dividing$the$percentage$change$in$the$quantity$supplied$of$a$product$by$the$percentage$
change$in$the$product’s$price.$
Price!elasticity!of!supply$=$%$change$in$quantity$supplied$/$%$change$in$price$
This$will$always$be$positive.$The$primary$determinant$of$the$price$elasticity$of$supply$is$the$amount$
by$which$production$costs$rise$as$output$levels$rise.$Key$determinants$include$
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Length$of$time$involved$in$production$
Type$of$industry$
Availability$of$inputs$
Existing$capacity$
Inventories$held$
When$demand$changes,$the$change$in$price$depends$on$the$price$elasticity$of$supply.$
If$you$know$the$value$of$the$price$elasticity$of$demand,$then$you$can$compute$the$effect$of$a$price$
change$on$the$quantity$demanded.$
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Chapter(5(–(Economic(Efficiency,(Government(Price(Setting(and(Taxes(
Consumer( surplus:$ The$ difference$ between$ the$ highest$ price$ a$ consumer$ is$ willing$ to$ pay$ and$ the$
price$ the$ consumer$ actually$ pays.$ It$ represents$ the$ area$ below$ the$ demand$ curve$ and$ above$ the$
market$price.$It$represents$the$benefit$to$consumers$in$excess$of$the$price$they$paid$to$purchase$the$
product.$
Marginal(benefit:$The$additional$benefit$to$a$consumer$from$consuming$one$more$unit$of$a$good$or$
service.$The$demand$curve$often$can$be$a$marginal$benefit$curve.$
Marginal(cost:(The$additional$cost$to$a$firm$from$producing$one$more$unit$of$a$good$or$service$
Producer(surplus:(The$difference$between$the$lowest$price$a$firm$would$have$been$willing$to$accept$
and$the$price$it$actually$receives.$It$is$equal$to$the$area$above$the$supply$curve$and$below$the$market$
price.$
Consumer$surplus$measures$the$net$benefit$(total$benefit$minus$total$price$paid)$to$consumers$from$
participating$in$a$market.$
Producer$ surplus$ measures$ the$ net$ benefit$ (total$ benefit$ minus$ total$ cost$ of$ production)$ to$
producers$from$participating$in$a$market.$
Equilibrium$ in$ a$ competitive$ market$ results$ in$ the$ economically$ efficient$ level$ of$ output$ where$
marginal$benefit$equals$marginal$cost$
Economic(surplus:$The$sum$of$consumer$surplus$and$producer$surplus$
Deadweight( loss:( The$ reduction$ in$ economic$ surplus$ resulting$ from$ a$ market$ not$ being$ in$
competitive$equilibrium.$
Economic(efficiency:(A$market$outcome$in$which$the$marginal$benefit$to$consumers$of$the$last$unit$
consumed$is$equal$to$the$marginal$cost$of$production,$and$where$the$sum$of$consumer$surplus$and$
producer$surplus$is$a$maximum.$$
Equilibrium$in$a$competitive$market$results$in$the$greatest$amount$of$economic$surplus,$or$total$net$
benefit$to$society,$from$the$production$of$a$good$or$service.$
Price(floor:(A$legally$determined$minimum$price$that$sellers$may$receive.$(Top)$
Price(ceiling:(A$legally$determined$maximum$price$that$sellers$may$charge.$$(Bottom)$
Black( market:( Buying$ and$ selling$ at$ prices$ that$ violate$ government$ price$ regulations.$ When$
government$imposes$price$floors$or$price$ceilings$–$some$people$win,$some$lose$and$there$is$a$loss$of$
economic$efficiency$(dead$weight$loss)$which$can$be$large.$
Tax(incidence:(The$actual$division$of$the$burden$of$a$tax$between$buyers$and$sellers$in$a$market$
Who$actually$pays$it?$Answer$depends$on$
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Slope$of$demand$curve$and$price$elasticity$of$demand$
Slope$of$the$supply$curve$and$the$price$elasticity$of$supply$
Chapter(6(–(Technology,(Production(and(Costs(
Technological( change:( A$change$in$the$ability$of$a$firm$to$produce$output$with$a$given$quantity$of$
inputs.$
Short(run:(The$period$of$time$during$which$at$least$one$of$the$firm’s$inputs$is$fixed$
Long( run:( A$ period$ of$ time$ long$ enough$ to$ allow$ a$ firm$ to$ vary$ all$ of$ its$ inputs,$ to$ adopt$ new$
technology,$and$to$increase$or$decrease$the$size$of$its$physical$plant.$
Total(cost:(The$cost$of$all$the$inputs$a$firm$uses$in$production$
Variable(costs:(Costs$which$change$as$the$quantity$of$output$changes$
Fixed(costs:(Costs$which$remain$constant$as$the$quantity$of$output$changes$
Total(Cost(=(Fixed(Cost(+(Variable(Cost(
(
TC(=((
(
FC(
+(
VC(
Examples$of$fixed$costs$include$salaries,$rent,$utilities,$postage$etc.$
Opportunity(cost:(The$highestEvalued$alternative$that$must$be$given$up$to$engage$in$an$activity$
Explicit(cost:(A$cost$that$involves$spending$money$
Implicit(cost:(A$nonEmonetary$opportunity$cost.$
Production(function:( The$relationship$between$the$inputs$employed$by$the$firm$and$the$maximum$
output$it$can$produce$with$those$inputs.$
Average(total(cost:(Total$cost$divided$by$the$quantity$of$output$produced.$
Marginal( product( of( labour:( $The$additional$output$a$firm$produces$as$a$result$of$hiring$one$more$
worker.$
Law(of(diminishing(returns:(The$principle$that,$at$some$point,$adding$more$of$a$variable$input,$such$
as$labour,$to$the$same$amount$of$fixed$input,$such$as$capital,$will$cause$the$marginal$product$of$the$
variable$input$to$decline.$
Average(product(of(labour:(The$total$output$produced$by$a$firm$divided$by$the$quantity$of$workers.$
Marginal(cost:(The$change$in$a$firms$total$cost$from$producing$one$more$unit$of$a$good$or$service$
MC(=(∆TC/(∆Q(
As$long$as$marginal$cost$is$below$average$total$cost,$average$total$cost$will$be$falling.$When$marginal$
cost$is$above$average$total$cost,$average$total$cost$will$be$rising.$The$relationship$between$marginal$
cost$and$average$total$cost$explains$why$the$average$total$cost$curve$also$has$a$UEshape.$
Average(fixed(cost:(Fixed$cost$divided$by$the$quantity$of$output$produced$
Average(variable(cost:(Variable$cost$divided$by$the$quantity$of$output$produced$
Average$total$cost$=$ATC$=$TC/Q$
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Average$fixed$cost$=$AFC$=$FC/Q$
$
Average$variable$cost$=$AVC$=$VC/Q$
$
ATC$=$AFC$+$AVC$
MC,$ATC$and$AVC$are$all$U$shaped,$and$the$marginal$cost$curve$intersects$the$average$variable$cost$
and$average$total$cost$curves$at$their(minimum!points.(
As$output$increases,$AFC$gets$smaller$and$smaller.$
As$output$increase,$the$difference$between$average$total$cost$and$average$variable$cost$decreases.$
LongUrun(average(cost(curve:(A$curve$showing$the$lowest$cost$at$which$the$firm$is$able$to$produce$a$
given$quantity$in$the$long$run,$when$no$inputs$are$fixed.$
Economies(of(scale:$Economies$of$scale$exist$when$a$firm’s$longErun$average$costs$fall$as$it$increases$
its$scale$of$production$and$the$quantity$of$output$it$produces.$