rev2f06-updated - Review for Test 2 Some Key Concepts from...

Info iconThis preview shows pages 1–17. Sign up to view the full content.

View Full Document Right Arrow Icon
Review for Test 2 Some Key Concepts from Unit Two: Chapters 3-5
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Supply and Demand Supply and Demand determine prices in individual markets. Price is the mechanism that brings supply and demand together.
Background image of page 2
Law of Downward Sloping Demand When the price of a commodity is raised (and other things are held constant), buyers tend to buy less of the commodity. Similarly, when the price is lowered, other things being constant, quantity demanded increases. The downward slope in demand can be explained by decreasing marginal utility.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Substitution Effect When the price of a good rises, I will substitute other similar goods for it. For example, if the price of beef rises, I will eat more chicken and pork.
Background image of page 4
Income Effect As the price of a commodity rises, my income will not stretch as far as it used to. I am therefore “poorer” in a relative sense, than before the price increase.
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Market Demand Curve The market demand curve “adds up” all the quantities demanded by individual consumers at a given price. It shows the total amount of a quantity consumers are willing and able to buy at a given price.
Background image of page 6
The Demand Curve D Q P Elasticity of demand refers to movements along the curve.
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Moving Along Demand If the price of a product changes, consumers move along the demand curve to a new quantity. If price rises, quantity demanded falls. If price falls, quantity demanded rises. The curve itself DOES NOT MOVE. The movement is from one point to another ON THE ORIGINAL CURVE,
Background image of page 8
Elasticity of Demand The elasticity of demand tells us the relationship between the percentage change in quantity and the percentage change in price as we move along a demand curve.
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Demand for Pretzels D Q P A $10 3 At a price of $10, 3 pretzels will be sold in this market. Point A on the demand curve shows this relationship.
Background image of page 10
Total Revenue Total Revenue is price times quantity. In this case, total revenue would be $30 ($10x3).
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Demand for Pretzels D Q P $5 9 At a price of $5, 9 pretzels will be sold in this market. Point B on the demand curve shows this relationship. B
Background image of page 12
Moving from A to B In moving from point A to point B, we have gone down the original demand curve. As the price of pretzels fell, the quantity demanded increased. Price and quantity move in opposite directions on a demand curve.
Background image of page 13

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Total Revenue at Point B Total Revenue at point B is $45. ($5x9) Total Revenue got larger as we moved from point A to point B because the increase in quantity was larger, in relative terms, than the decrease in price. Price fell by 1/2 ($10 to $5), but quantity tripled (3 to 9). The increase in quantity more than offset the decrease in price.
Background image of page 14
We can calculate this elasticity Price Q 10 3 5 9 % change in price is 5/7.5*100% = 66.67 (midpoint convention) % change in q is 6/6*100% = 100% Ed = 100%/66.67% = 1.5 Elastic demand
Background image of page 15

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
To find out what happens to TR To find out what happens to TR as we move along a demand curve we have to know which change is proportionately bigger, the change in quantity or the change in price. TR will move in the same direction as the
Background image of page 16
Image of page 17
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 11/15/2011 for the course AGEC 7100 taught by Professor Duffy,p during the Fall '08 term at Auburn University.

Page1 / 110

rev2f06-updated - Review for Test 2 Some Key Concepts from...

This preview shows document pages 1 - 17. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online