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P&R Chap 2
Supply and Demand
24
Economics
Graduate
09/22/2013

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Term
Demand Curve (Equation)
Definition
Qd = Qd(P)
Term
Supply Curve (Equation)
Definition
Qs = Qs(P)
Term
"change in supply"
Definition
shift in supply curve

(typically in response to price changes)
Term
"change in quantity supplied"
Definition
movements along the supply curve

(typically in response to "other supply-determining variables" such as lower wages, production costs, raw material costs, interest rates...)
Term
elasticity
Definition
percentage change in one variable resulting FROM a 1-percent increase in another
Term
price elasticity of demand
Definition
percentage change in quantity demanded of a good resulting FROM a 1-percent increase in its price. i.e... "the change in quantity associated with a change in price"

FORMULA: Ep = (% change Q)/(% change P)
or...
Ep = (P/Q) times (change Q/ change P)

*usually a negative number
Term
linear demand curve
Definition
demand curve that is a straight line (slope is constant)
Term
magnitude of price elasticity of demand
Definition
its absolute size

e.g. if Ep = -2, then the elasticity is 2 in magnitude
Term
demand is price elastic when...
Definition
price elasticity is >1 in magnitude (typically when close substitutes exist)
Term
demand is price inelastic when...
Definition
price elasticity is <1 in magnitude (typically when few close substitutes exist)
Term
main factors affecting price elasticity of demand
Definition
in general, price elasticity of demand depends on the availability of substitute goods.

i.e.... when there are close substitutes, a price increase will cause consumer to buy LESS of the good and MORE of the substitute. demand will then be highly price elastic.
Term
infinitely elastic demand
Definition
(a flat, horizontal demand curve)

principle that consumers will buy as much of a good as they can get a single price. BUT... for any higher price, the quantity demanded drops to zero, while for any lower price quantity demanded increases without limit.
Term
completely inelastic demand
Definition
(a vertical demand curve)

principle that consumers will buy a fixed quantity of a good, regardless of its price
Term
arc elasticity of demand
Definition
price elasticity calculated over a range of prices
Term
measuring price elasticity of demand...
Definition
must be done at a particular point on the demand curve. this is because it will generally change as you move along the curve.
Term
Income elasticity of demand
Definition
percentage change in the quantity demanded resulting from a 1-percent increase in income

* demand for goods usually rises when aggregate incomes rise

FORMULA: IEoD = (% Change in Quantity Demanded)/(% Change in Income)
Term
cross-price elasticity of demand
Definition
how demand for some goods is affected by prices of other goods

DEF: percentage change in the quantity demanded of one good resulting from a 1-percent increase in the price of another

FORMULA: CPEoD = (% Change in Quantity Demand for Good X)/(% Change in Price for Good Y)

*positive when goods are substitutes (when the price of butter goes up, so too will demand for margarine)

*negative when compliments (the cross-price elasticity of motor oil with respect to gasoline is negative, since increases in gas prices make people drive less, pushing down demand for motor oil)
Term
cross-price elasticity of demand
Definition
Term
price elasticity of supply
Definition
percentage change in quantity supplied resulting from a 1-percent increase in price.

*usually positive, since higher prices give producers incentives to increase output
Term
variables that affect elasticities of supply
Definition
- prices (price elasticity of supply -- usually positive)
- production costs (wages, raw materials, etc -- usually negative, since higher costs put downward pressure on production)
Term
point elasticities
Definition
elasticities at any particular point on the demand curve or supply curve
Term
arc elasticities
Definition
calculating elasticity over a portion of the demand or supply curve
Term
arc elasticity of demand
Definition
price elasticity calculated over a range of prices

*rather than choosing either the initial or the final price, we use an average of the two

FORMULA (for any elasticity ** verify this): [[QDemand(NEW) - QDemand(OLD)] / [QDemand(OLD) + QDemand(NEW)]]*2
Term
still need to review:
short-run vs long-run elasticities
effects of gov-intervention/price controls
practice Qs
Definition
do it ok.
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