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MICROECONOMICS
A. B.
The price of a good or service is determined by demand and supply.
Demand is the quantity of a good or service that consumers are willing and able to
purchase
at a range of prices at a particular time.
1.
A demand curve shifts when demand variables other than price change (e.g., the
price of other goods and services, the price of complement products, consumer
tastes, size of the market, or group boycott).
Price elasticity of demand measures the sensitivity of demand to a change in the
product's price. It is measured with the following formula:
_ Change in_qu_antity demanded Average quantily
Change in price Average price
3.
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7.
If E0is greater than 1, demand is elastic (sensitive to price changes). If Eu is less
than 1, demand is inelastic (not sensitive to price changes). If Enis equal to 1
demand is unitary (not sensitive or insensitive to price changes).
Income elasticity of demand measures the change in quantity demanded of a
product given a change in consumer income. The demand for normal goods goes
up as income increases, while the demand for inferior goods goes down as income
increases. The cross-elasticity of demand measures the change in demand for a
good when the price of a related or competing product is changed. If demand for
the product goes up with an increase in the price of the other product, the products
are substitutes. If demand goes down the products are complements.
The law of diminishing utility refers to the fact that as a consumer obtains more
of a product the marginal utility from obtaining an additional unit of the product
decreases. The relationship between changes in personal disposable income and
consumption is described by a consumption function. The slope of the
consumption function measures the consumer's marginal propensity to consume. It
illustrates the percentage of an additional dollar in income that the consumer
spends. One minus the marginal propensity to consume is the marginal propensity
to save.
C. The supply curve (schedule) shows the amount of a good or service that would
be supplied at various prices. . . . .
1. A supply curve shift occurs when supply variables other than price change
(e.g., government subsidies, government price controls, prices of other goods, or
price expectations).
2. Elasticity of supply measures the percentage change in quantity supplied of a
product when the price changes.
3. Market equilibrium occurs at the intersection of the demand and supply
curve. At the equilibrium price all of the supplied goods will be sold.
4. Government intervention can alter market equilibrium.
a. A price ceiling can cause too few goods to be produced causing market
shortages, b. A price floor can cause too many goods to be produced causing
overproduction.
5. The products supplied by a firm depend on the firm's production costs.
a. In the short run, firms have both fixed and variable costs.
b. In the long run, all costs are variable because additional plant capacity can be
added. As a firm increases its productive capacity, three outcomes are possible.