Economics 302 Notes

Economics 302 Notes - Economics 302 Notes Chapter 2 Supply...

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Economics 302 Notes Chapter 2 Supply and Demand The supply curve is the relationship between the quantity of a good that producers are willing to sell and the price of a good. o Other variables affecting supply include wages, raw material costs, and interest changes. o When production costs decrease, output increases no matter what the price. o Change in supply refers to shifts in the supply curve, which change in the quantity supplied refers to movements along the supply curve. The demand curve shows the relationship between the quantities of a good that consumers are willing to buy and the price of the good. o Besides price, income plays a large role in how much consumers will buy. o Change in demand refers to shift of demand curve while change in quantity demanded refers to movement along the demand curve. Goods are SUBSTITUTES when an increase in the price of one leads to a increase in the quantity demanded of another. (Beef and Chicken) Goods are COMPLEMENTS when an increase in the price of one good leads to a decrease in the quantity demanded of the other. (Cars and Gasoline) 2.2 The Market Mechanism Equilibrium price is the price where quantity supplied equals quantity demanded. The market mechanism is the tendency in a free market for price to change until the market clears. A surplus is where quantity supplied is higher than quantity demanded. A shortage is where quantity demanded is higher than quantity supplied. 2.3 Changes in Market Equilibrium Demands may shift due to a shift in season, changes in price of related goods, or changing tastes. Supply may shift due to wage rates, capital costs, and raw material prices. 2.4 Elasticity’s of Supply and Demand Elasticity is the percentage change in one variable resulting from a 1 percent increase in another. o Price elasticity of demand is the percentage change in quantity demanded of a good resulting from a one percent increase in its price.
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Price Elasticity of Demand = %Change in Q / %Change in P OR it can also be written as P/Q * ∆Q/∆P When Price Elasticity is greater than one we say that the demand is price elastic. When price elasticity is less than one we say that the demand is price inelastic. When there are substitutes, price will tend to be elastic. Elasticies will change as it moves down a linear demand curve. Q = a – bP Steeper the slope of the curve, the less elastic is the demand. Infinitely Elastic Demand = Consumers will buy as much of a good as they can at a single price but for any increase in price, the quantity demanded drops to zero. Completely Inelastic Demand = Consumers will buy a fixed quantity of a good regardless of the price. Income Elasticity of Demand is the percentage change in quantity demanded resulting from a one percent increase in the price of another.
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Economics 302 Notes - Economics 302 Notes Chapter 2 Supply...

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