ECC1000 Study Guide - Final Guide: Marginal Utility, Tax Incidence, Marginal Product

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Supply And Demand
Price of product falls, quantity demanded increases.
Price of product increases, quantity demanded decreases.
Demand curve shows the willingness and ability to buy the product.
Point A: Maximum willingness to pay
Shift in demand: Recession, Income
Normal good is a good that you will buy more when your income increases
Inferior good is a good that you will buy less when your income increases
Price increases, quantity supplied increases
Price decreases, quantity supplied decreases
Shift in supply: Natural disaster, Resource scarcity
Shortage will cause difficulties.
Price goes up, quantity supplied goes up, quantity demanded decreases which causes a surplus.
Change in quantity demanded:
Assumption= Ceteris Paribus -> All other factors are fixed.
1. Income: Normal good D increases, Inferior good D decreases
2. Taste Preferences
3. Number of consumers
4. Price of other goods (Compliment goods, substitute goods)
5. Expected price
Shift in supply:
1) Technology
2) Input price/ Cost
3) Expected price
4) Number of sellers
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ELASTICITY
Price Inelastic: No close substitutes, Broad market
Price Elastic: Close Substitutes, Narrow market
Goods tend to have more elastic demand over longer time horizon.
Price elasticity of demand is a measure of how much the quantity demanded of a good reponds
to a change in price of that good.
Price elasticity of demand = (% change in quantity demanded)/ (%change in price)
Point formula: (% change in Qd) / (% change in P) = (ΔQd/Qd) / (ΔP/P) = (ΔQd/ ΔP) x (P/Qd)
Arc formula: (Pavg /Qdavg ) x (ΔQd / (ΔP)
Perfectly inelastic demand E=0: Kidney, Heart
Inelastic demand E<1: Electricity, Water, Food (anything that is necessity)
Inelastic demand: % change in quantity demanded is lesser than % change in price
Elastic Demand: % change in quantity demanded is larger than % change in price
Elastic Demand >1 : Smartphones, Cars
Perfectly elastic demand E=infinity: Flea market (?)
When the curve is less steep, Elastic >1
Price is more elastic when price is higher as people are more sensitive.
Elastic: Price increase, Total Revenue decrease
Inelastic: Price increases, Total Revenue increases
(Revenue Gain < Revenue lost, TR decrease)
(Revenue Gain > Revenue Lost, TR increase)
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Perfectly inelastic supply: Cant chg the supply (chairs in a hall)
Price Elastic supply: Can change but in a long run
Normal goods positive, inferior goods negative.
Ed= Chg in % quantity / Chg in percentage price
Ed>1 Elastic, Ed=1 Unity, Ed<1 Inelastic
Midpoint formula:
Change in % price = Change in price/ price x 100%
=(P2-P1)/(P2+P1/2) * 100%
Change in % quantity = Change in quantity/ price x 100%
= (Q2-Q1)/(Q2+Q1/2) *100%
Ed= [(Q2-Q1)/(P2-P1)] * [(P2+P1)/(Q2+Q1)]
Point formula:
Ed= change in Q/ Change in P * P/Q
Ei= [Q2-Q1/ I2-I1 ]* [I2+I1/Q2+Q1]
Px increase, Dy increase = substitute Es>0
Px increase, Dy decrease =compliment Es<0
Market Failure & Government intervention
Competitive market: Larger number of buyers and sellers, thus one buyer or seller cannot influence the
whole marker. There is no deadweight loss.
Government intervention:
1) Price Ceiling- Maximum price that can sell.
a) Binding: Effective (below equilibrium price)
b) Non-binding: above equilibrium price
2) Price floors: legal minimum price that can sell
3) Taxes
4) Subsidies
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Document Summary

Demand curve shows the willingness and ability to buy the product. Normal good is a good that you will buy more when your income increases. Inferior good is a good that you will buy less when your income increases. Price goes up, quantity supplied goes up, quantity demanded decreases which causes a surplus. Assumption= ceteris paribus -> all other factors are fixed. Income: normal good d increases, inferior good d decreases: taste preferences, number of consumers, price of other goods (compliment goods, substitute goods, expected price. Input price/ cost: expected price, number of sellers. Goods tend to have more elastic demand over longer time horizon. Price elasticity of demand is a measure of how much the quantity demanded of a good reponds to a change in price of that good. Price elasticity of demand = (% change in quantity demanded)/ (%change in price)

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