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Oct.8 2013.docx

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David Gray

ECO 1104 B Oct.8th, 2013 YUJIE YI #7038840 Chapter 4 (FINALEXAM) What is the role of equilibrium quantity in microeconomics?  The best way to understand an equilibrium is to examine a disequilibrium situation.  Case 2: Suppose that the transactions price < equilibrium price - Qs < Qd, and a SHORTAGE emerges. The cupboard is bare.As customers become irritable and aggressive, they are tempted to bid up prices. - 2 effects occur  Price rises, Qs rises due to law of supply  Price rises, Qs falls due to law of demand - Eventually, Qs = Qd as equilibrium is restored. - There is no further incentive to change  This is an illustration of the price system in action.  Notice how this process occurs autonomously (by itself).  Back to the example of microcomputers, which are about 30 years old - In 1987, I bought an “Apple Maclntosh 800 k” with “image – writer” printer for what in 2013 $ would be about $3,600 CN - The price adjusted for quality (which is much superior now) has now dropped to below $1,000 - Almost all due to technological advances and resulting cost reductions on the SUPPLY side  Another illustration from fairly recent events 1/6  Price of wheat rose a lot (not alot) due to crop failures - Supply contracted (shift to the left)  Price of pasta went way up, provoking demonstrations in Italy - Supply contracted because the cost of a major input, wheat, increased  Apoint absent from the textbook - Often, society judges this equilibrium, “market” price to be unfair and/or unjust - An equilibrium price can be “too low”, which is bad news for producers - An equilibrium price can be “too high”, which is bad news for consumers. Conclusion of Chapter 4  Read it carefully! - It deals with some of the issues I have already talked out, namely how the price system, operating through the forces of supply and demand allocates scarce resources in a decentralized fashion. Chapter 5 Price Elasticity of Demand Price Elasticity of Demand  Recall the law of demand: as P increases (decreases), Qd decreases (increases) - This is ALWAYS true in this course.  Forget about S for the moment  The question of this chapter is: By HOW MUCH does Qd respond? - Figure 5.1 a,b : unresponsive cases (inelastic) - Figure 5.1 d,e : the responsive cases (elastic) ECO 1104 B Oct.8th, 2013 YUJIE YI #7038840  The PED is defined as the % change in Qd divided by the % change in P - (ΔQd/ Qd) / (ΔP/P) - Related to the slope of the D curve, but it is not the same thing. By rearranging that equation, one can express it as - [1 / (ΔP/ΔQd)] * (P/ Qd) - The base values are averages  By construction, it
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