Law of Demand
an increase in price leads to a decrease in quantity demanded
Causes of Change in Demand (shift)
changes in tastes, income, personal taxes, prices of related goods, expected future price/quantity, # of buyers, change in planned consumption at all prices
Causes of Change in Quantity Demanded
change in price
Law of Supply
an increase in price leads to an increase in quantity supplied
Causes of Change in Supply
changes in cost of production, business taxes, expected future price/quantity, price of other produced goods, # of sellers, technology, change in planned sales at all prices
price ceiling
BELOW equilibrium; shortage; quantity demanded is greater than quantity supplied
price floor
ABOVE equilibrium; surplus; quantity demanded is less than quantity supplied
total utility
the satisfaction obtained by the consumer from consuming a good
marginal utility
the extra utility from an additional unit of consumption;
the slope of the total utility
law of diminishing marginal utility
MU decreases as more quantity is consumed
budget line/constraint
level of income that the consumer needs to allocate between goods A and B; (rotate if change in P, shift out if increase in income);
Income= (Pa
Qa) + (Pb
Qb)
Slope= -Pa / Pb
relationship between utility and the law of demand
as price increases, the utility of the marginal dollar spend decreases (marginal dollar buys less);
quantity demanded falls in line with the law of demand
price elasticity of demand
responsiveness of quantity demanded to a change in price;
% change in Qd / % change in p (absolute value)
Ed = (Q2-Q1 / Q1+Q2) / (P2-P1 / P1+P2)
perfectly elastic
abs value of elasticity = infinity
elastic
abs value of elasticity > 1
inelastic
abs value of elasticity < 1
unit elastic
abs value of elasticity = 1
perfectly inelastic
abs value of elasticity = 0
consumer surplus
price is lower than the consumer's willingness to pay
producer surplus
price is higher than the seller's willingness to sell
comparative advantage
the other is better at both A and B, you are better at B than A
CA = # B produced / # A produced
absolute advantage
to be better at something in all areas
equilibrium
Qs = Qd
maximizing utility
MU/P = MU/P for all goods and spend all income