Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

Lecture 2
2017年1月19日

13:56

Demand and price
• Law of demand
-- There is an inverse relationship between quantity demanded and price
...

-- QD = f(P) (Quantity demanded is a function of price)
-- Y = mX +b --> QD = a - bP (a => quantity Intercept
- => Inverse relationship between price and quantity demanded
b => The amount that QD goes down by each time the price goes up)

• Inverse Demand Function
The mathematical function where price is a function of quantity
P = f(QD)
• Choke price
-- The price when Quantity is 0
-- The constant in an inverse linear demand curve
• Reservation Price
The highest amount an individual would be willing to pay for a unit of a good
• Multivariable Demand Function
Q DX = f (PX, PY, I, H)
--Normal Good
When consumer get richer, demand expands
When consumer get poorer, demand contracts
--Inferior Good
When consumer get poorer, demand expands
When consumer get richer, demand contracts
--Compliment
When the price of Good A rises, the demand for Good B contracts
...


--Substitutes
When the price of Good A rises, the demand for good B expand
...

--Consumer Expectations
If the future Price of a good is expected to be higher than previously thought, then the demand today will
expand
...

--Numbers of Consumers
At any given price, if the size of the population of consumers grows, then the demand will expand
...

At any given price, if the size of the population of consumers declines, then the demand will contract
...

If willingness to pay declines (WTP), then demand contracts
...

As price of a good falls, the quantity supplied falls, ceteris pari
• Supply function
Qs = f(P)
QS = a + bP

(a => quantity Intercept
+ => Positive relationship between price and quantity supplied
b => The amount that QS goes up by each time the price goes up)

• Inverse Supply Function
• Marginal Cost
The lowest amount a film would be willing to sell a unit of the good for
...

• Contraction of supply - leftward
Expansion of supply - rightward
Change in quantity supply - move along the curve
• The factors cause expansions and constructions of supply
-- Input prices
input prices rises causing supply to contract

-- Production Technology
When production technology improves supply expands
...
Assembly line
-- Produce Expectation
If the future price of a good is expected to be higher than previously thought, the supply today will contract
...

-- Anything else
ECON 302 Page 2

-- Anything else
if something lowers marginal cost, then supply expands
...

-- A negative sign on b2 could indicate that producing good X creates an opportunity cost in that the firm
cannot produce good Y
...

• Shortage
Occurs when quantity demand > quantity supplied at the current price
...
Start with a demand and supply function
...
Set QD= QS and solve for P
...
Use Price to solve for Qd and Qs
...

• Own-Price Elasticity of Demand
A measure of responsiveness of quantity demanded of good X to a change in the price of good X
...

ES = %ΔQs / %ΔP
ES = ( QS / P) * (P/Q)

ECON 302 Page 3

• Perfectly Inelastic
-- Change in price has no effect on quality demanded ( or supplied )
-- E = 0
-- Vertical line

• Inelastic
0 < |E| < 1
The percentage change in quantity is smaller than the percentage change in price
• Unit Elastic
|E| = 1
A percentage change of price has brought about an equal percent change in quantity
• Elastic
1 < |E| < ∞
A percentage change in price has brought about a larger percent change in quantity
...


• Perfectly Elastic
|E| = ∞
A tiny change in price will bring about an infinite change in quantity demanded
Horizontal line

• Three Things that Make Demand More Elastic
-- Many good substitutes
-- Long time horizon for adjustment
-- Large share of budget

• When demand is elastic:
-- Raising price will lower expenditures (revenues)
...

-- Lowering price will lower expenditures
...

• Cross-Price Elasticity of Demand
-- A measure of responsiveness of quantity demanded of Good A to a change in the price of
Good B
...


• Income Elasticity of Demand
A measure of responsiveness of quantity demands of Good A to a change in income

---