Econ Notes - I Economic equilibrium A QD =...

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Unformatted text preview: I. Economic equilibrium: A. QD = D(P,PC,PS,M,T/P,Ex,N) (n = number of consumers) B. QS = S(P,PI, T, G, Ex, N) (n = number of producers) 1. (Supply/Demand curves use only S(P) and D(P) as models) a. If other variables than price change, entire curve shifts to the right 2. Differences between QS/QD and S/D: a. QS/QD depends on price, and are represented as a movement along a constant S/D curve b. S/D do not depend on price, and are represented by the entire S/D curve shifting C. Point where supply and demand curves meet = point of equilibrium (market clearing price) 1. If actual price > market clearing price, surplus occurs, and price inevitably drops 2. If actual price < market clearing price, shortage occurs, and price inevitably r ises I I. Supply/Demand in a labor market: A. Equilibrium wage: there should be no unemployment at this point (no surplus/shortage of labor) 1. Gov’t sets minimum wage: puts all wages above equilibrium point, thus creating unemployment (labor surplus) I I I. Government effects on the market: A. Subsidies: The gov’t can help pay producers for the costs of production, or offer to buy up products for x amount setting a price floor (higher than the current market price, usually in agricultural markets) 1. Can create surpluses that the government buys up and disposes of a. Tossing in the ocean b. Gives to third world countries (potentially ruining self-sufficiency projects that said countries are trying to start up) IV. P rice Ceilings: A. Rent: Rent prices may have a government-set maximum below the current equilibrium price, creating a price ceiling 1. Creates shortages of apartments for rent 2. Creates slums in which landlords are unwilling to put more money into apartments V. Elasticity: A. The way in which quantity demanded responds to change in price: 1. If demand is elastic, quantity demanded will vary greatly with price changes a. In a market with elastic demand, as price rises, revenue falls 2. If demand is inelastic, quantity demanded will only vary slightly with price changes a. In a market with inelastic demand, as price rises, revenue rises 3. If % Q/% P > 1, demand is elastic; Δ Δ if % Q/% P <1, demand is Δ Δ inelastic 4. If a commodity takes up a small percentage of income, demand will be inelastic, and vice versa. Fu rthermore, necessities tend to have inelastic demand, while luxuries have very elastic demand B. What determines elasticity of demand? 1. Number of substitutes/competitors—if a product has few substitutes it will be very demand inelastic, and vice versa 2. % of income spent on item 3. Necessity vs. luxuries—necessities are more inelastic 4. Time—when prices change, it takes time to change habits and fine substitutes C. I ncome elasticity of demand: 1. How quantity demanded changes in relation to income a. % Q Δ D /% I > 1 => elastic Δ b. % Q Δ D /% I < 1 => inelastic Δ D. Cross-elasticity of demand: 1. How the percent change in a good effects the quantity demand of complement and substitute goods Chapter 6:...
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This note was uploaded on 05/07/2011 for the course ECON 202 taught by Professor Hammond during the Fall '11 term at Boise State.

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Econ Notes - I Economic equilibrium A QD =...

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