ECO 1104 B Oct.8th, 2013
YUJIE YI #7038840
(FINALEXAM) What is the role of equilibrium quantity in microeconomics?
The best way to understand an equilibrium is to examine a disequilibrium
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
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
- 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