ECO 108 Study Guide - Spring 2018, Comprehensive Midterm Notes - Demand Curve, Sales Tax, Economic Surplus
12 Oct 2018
School
Department
Course
Professor
ECO 108
MIDTERM EXAM
STUDY GUIDE
Fall 2018
Lecture 1
Demand
● If the price of lettuce rises, people will buy less lettuce. If the price of haircuts rises,
people will buy fewer haircuts. If speeding tickets get more expensive, there will be less
speeding
● When the price goes up, the quantity demanded goes down.
● The quantity demanded of a good is the amount that people want to consume in some
specified time period
● Because higher prices are associated with lower quantities, it follows that the demand
curve slopes downward, from the upper left to the lower right. The demand curve
represents a function that relates prices to quantities.
● The input is a price (such as $1 per cup) and the output is a quantity (such as 50 cups per
day)
● All demand curves slope down, but some slope down more steeply than others.
● A very flat demand curve indicates a great deal of price sensitivity. A very steep demand
curve indicates a very small amount of price sensitivity.
● To measure the steepness or flatness of a demand curve, economists use a number called
the elasticity of the curve.
● Elasticity = Percentage change in Quantity / Percentage change in Price
● The elasticity of the demand curve is a measure of price-sensitivity
● When demanders are very price-sensitive, the elasticity is very large. When demanders
are quite price-insensitive, the elasticity is very small.
find more resources at oneclass.com
find more resources at oneclass.com
● Quantity demanded is a number. Demand is a function. When the price of a good changes
the quantity demanded changes but the demand does not change.
● Only something other than a change in price can cause a change in demand.
● A change in price leads to a change in quantity demanded, which is represented by a
movement from one point to another along the existing demand curve. A change in
anything other than price can lead to a change in demand, which is represented by a
movement of the entire demand curve from one location to another.
● The effects of price changes are already built in to the original demand curve, but the
effects of other changes (such as the discovery that coffee is good for you) are not built
in.
● When we consider the demand for coffee, a change in the price of tea or donuts counts as
a change in something other than price, because the price of tea or donuts is not the same
thing as the price of coffee. Therefore a change in the price of tea or donuts can cause the
demand curve for coffee to shift.
● If the price of tea rises, some tea drinkers are likely to switch to coffee, so the demand
increases, as shown in the left-hand panel. If the price of donuts increases, people will eat
fewer donuts and are therefore likely to demand less coffee, as shown in the right-hand
panel.
● If the price of tea increases, people will drink less tea. Quite probably, some of those
people will drink more coffee as a substitute. Therefore the demand for coffee increases.
If the price of donuts increases, people will eat fewer donuts. Quite probably, some of
those people will demand less coffee, because they’ll have fewer donuts to wash down.
Thus the demand for coffee decreases.
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
If the price of lettuce rises, people will buy less lettuce. If the price of haircuts rises, people will buy fewer haircuts. If speeding tickets get more expensive, there will be less speeding. When the price goes up, the quantity demanded goes down. The quantity demanded of a good is the amount that people want to consume in some specified time period. Because higher prices are associated with lower quantities, it follows that the demand curve slopes downward, from the upper left to the lower right. The demand curve represents a function that relates prices to quantities. The input is a price (such as per cup) and the output is a quantity (such as 50 cups per day) All demand curves slope down, but some slope down more steeply than others. A very flat demand curve indicates a great deal of price sensitivity. A very steep demand curve indicates a very small amount of price sensitivity.
