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Unit 2: Supply and Demand, Law of Supply, Value of price elasticity of…
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Law of Supply
States that as prices increase, the quantity supplied increases.
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Once again, price doesn't affect supply - it affects quantity supplied
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Law of Demand Curve
a decrease in the price of the good causes an increase in the quantity demanded. Or, an increase in price causes a decrease in the quantity demanded.
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Important note -- this is NOT a change in demand, it's a change in the quantity demanded
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Graphing Demand
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Curve shows all the possibilities, if there isn't any change, of price and quantity demanded
If the price changes, we can use the curve to learn the new quantity demanded
Graphing Supply
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Curve shows all the possibilities, given the current conditions, of price and quantity supplied
If the price changes, we can use the curve to learn the new quantity supplied
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What is elasticity
Realize though
Most inelastic things do stretch (change) a little, just not as much as elastic things
The difference is that one will change significantly to pressure put upon it, and the other responds only a little
So, elasticity is how much a thing will change in relation to how much other things are changing
The formal, economic definition of elasticity
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3 Important Points
A well-defined system of property rights is necessary for the market system to function. People have the right to own their own capital or property
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People face constraints, limits such as income and time
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In summary
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Remember the 3 reasons demand curves slope downward -- diminishing marginal utility, the income effect, and the substitution effect
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Summary
When finding the magnitude of the value of the elasticity of demand, it's important to understand what the value means
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The impact of a given price change on total revenue will depend on whether demand is elastic, inelastic, or unit elastic
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At market equilibrium
Quantity demanded (QD) equals quantity supplied (QS). Where the supply curve and the demand curve intersect
The price is such that buyers wish to purchase the same amount sellers wish to sell. Perfect position for both sides.
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Summary
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Total surplus is maximized at equilibrium, as long as there are no market failures
Shifters
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However, the market will eventually force its way back towards equilibrium
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Summary
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Tariffs and quotas impact domestic markets for goods, as seen through changes in domestic price, quantity produced, and total economic surplus
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Defining Demand & Supply
Demand
The amount of a good or service that is ( or would be) bought at a range of prices over a particular time period
Supply
The amount of a good or service which sellers provide (or would provide) at a range of prices over a particular time period.
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Summary
Just like in elasticity of demand, know the value of elasticity of supply
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In summary
Knowing all the the formulas that deal with elasticity will be important as you move forward in Micro
Being able to calculate the cross-price elasticity of demand and knowing what the relationship shows will also be required
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Producer surplus
The difference between the amount a seller actually charges for a product and the price at which they would be willing to sell the product (Pe - WTS)
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Summary
Consumer and producer surplus are economists' way of measuring the benefits created for buyers and sellers in markets.
Consumers benefit from prices lower than their willingness to pay, and producers benefit from prices higher than their willingness to sell
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Market Supply Curve
Similarly, market supply curves are simply the (x-axis) sums of all the individuals supply curves with in that market
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Summary
Although it's not necessary to memorize the factors that affect the elasticity of supply, it's important to understand why supply might be elastic or inelastic
Summary
The supply-demand model helps us see how consumers and producers make decisions in markets, based on the equilibrium price, where Qd = Qs
Consumer surplus
Calculating
The difference between the amount buyers are willing to pay for a product and the amount they actually have to pay
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Graphically
consumer and producer surplus on a graph of a market at equilibrium, the market equilibrium represents the maximum total surplus outcome possible
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