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AEC Exam #2
Terms in this set (63)
Optimal consumption level of various goods
Movement along a curve
PRICE CHANGE $$$$
2 Ways price changes demand
-Substitution Effect; A change of quantity demanded due to change only in the relative price of good
-Income Effect; Change in quantity demanded only due to change in the consumers' purchasing power
- Usually reinforce
Shift in Demand Curve occurs when
Occurs when prices are constant, but one shift factor (i.e. income) will change; left or right
Demand Shift Factors
1) Changes in consumer income
2) Changes in prices of related goods
3) Changes in taste/preferences
4) Changes in # of consumers
The demand on graph is always angled \ , but if it is decreasing, which direction will the D2 be?
to the left of the original, aka a smaller triangle because less money and quantity
Three Primary Supply Shift Factors
1) Change in the price of related outputs (substitutes and complements)
2) Change in the cost of production
3) Change in the # of suppliers
Supply on graph will always be angled / , but when the supply is decreasing which way will it go?
To the left because decrease in quantity and higher prices
If the supply of something is increasing, which way is S2 going
to the right - increasing quantity, lower prices
Q2 - Q1 / Q2+Q1 // P2 - P1 / P2-P1
Price Elasticity of Demand (Ed)
Greater than -1 (Inelastic)
Less than -1 (Elastic)
Price Elasticity of Supply (Es)
Greater than +1 (Elastic)
Less than +1 (Inelastic)
What does Price Elasticity of Demand/Supply tell us?
Whether it is Elastic or Inelastic
Income Elasticity of Demand (Ei)
Greater than 0 (Normal)
Less than 0 (Inferior)
Cross Price Elasticity of Demand (Exy)
-Compares one good to another based on a 1% change
Greater than 0 = Substitute
Less than 0 = Compliment
Always positive when you have a sub for class :)
Factor price Elasticity of Supply (Ef)
Greater than -1 = Inelastic
Less than -1 = Elastic
For a 1% change in ____, _____ changes in the ____ direction by ______ percent, ceteris paribus.
ya u need to know this dumb bitch
For cross price elasticity and Factor price supply (?), ....
you must cater to the complement. Change the price around 2 cents and put into formula to get quantity demanded (put in simplified equation) an
Factors Affecting Demand Elasticity
1) Availability of substitutes
2) Budget Share
3) Adjustment Period
4) Degree of Necessity
More elastic the demand
Why do producers respond less to changes in some prices more than others?
1) Analytical time period (adjustment period)
2) Storability, more storable, more elastic
3) Reserve Capacity - can accommodate more horses, but rice hard to accommodate with little space
4) Investment Risk - More risky are inelastic, less risky more elastic
- Those weird ass Emu things that are risky, less responsive
5) Entry/Exit barriers - High entries are less elastic
- Low barriers - more elastic (get a shovel a get at it, heirloom tomato example)
6) Factor Sustainability - More substitutes more elastic, milk requires specialization, not useful for anything else, Corn equipment versatile can be used for more
Inelastic Demand Graph looks like?
Almost vertical but still maintaining \
Inelastic Supply Graph look like?
Almost vertical but still maintaining /
Perfectly Inelastic Demand and Supply looks like?
An "I" Shape
Perfectly Elastic Demand and Supply
Total Revenue = ?
Equilibrium Price * Output Quantity
For elastic P & TR move ?
For inelastic P & TR move?
Effect of a tax, subsidy or other production cost change on the welfare of consumers or producers
= Less elastic (inelastic) side pays more, cigarette buyers
Set of tools that buyers & sellers use to identify and agree on prices and other terms of exchange
Cash on the spot, ex roadside market
Start high and descend until someone agrees on the amount (tulips)
Sealed first price
bid only once, no idea of others bid, highest and best first (or for government projects, lowest)
Reserve Price (for auctions)
If highest bid is below the reserve price, auction is void
1) Many Bidders
2) Frequently bidding
3) Bid autonomously
Contracting - Production versus Marketing
Production Contract- Livestock, Processor is owner, paid fee for service ; highest profit
Marketing Contract- Crops, Farmer is owner, farmer provides input, seed, transportation, harvesting, farmer gets market payment for service
Reasons for Contracts
1) Scale-economy benefits
2) Capacity Requirements
3) Spot Market Inefficiency
4) Identify preservation
5) Public policies
Three types of Price Discovery
1) spot/cash markets (including auctions)
2) futures markets
3) contracting (e.g., forward, production, and marketing contracts)
The law of demand states that own-price and quantity demanded are inversely related, cp.
True (key word inverse)
What major demand shift factors are excluded from individual demand equations
Taste & Preferences
Supply functions include which of the following variables?
a) the price of the good (own-price)
b) the prices of inputs
c) the prices of related goods
Supply a) the price of the good (own-price)
Supply b) the prices of inputs
Demand c) the prices of related goods
Demand d) income
Finding Income Elasticity
1) Simplify the equation, aside from variable were working with.
2) Use whats given for that variable, example $30,000 and plug into equation. Then use another number, $30,300 into the same equation. These outcomes will represent the quantity portions of Arc Elasticity.
4) Plug in and find IE
For a 1% change in income, QD changes in the ? direction by ___, cp.
Assume that the income elasticity for oysters is +2.0. How much change in the Q demanded of oysters would you expect if there is a 10% increase in incomes of all households in a given market? If demand for oysters was initially 100 pounds per year, what would be the expected total quantity demanded (in pounds) given a 10% increase in average incomes.
Ei = % Qd/%I
= 2/1 = x/10 = 20%
Initial 100 * .2 = 20 additional
The most significant factor affecting demand elasticity?
Availability of substitutes
The most important factor affecting supply elasticity?
Factors Effecting Supply Elasticity
Greater storability is likely to ___ price elasticity of supply for a given good?
What strategies do economists use when calculating elasticity to avoid inaccurate or highly variable estimates
1) Use ARC elasticity formula for change in price
2) Use calculus to see small changes
Given two prices and quantities, The arc formula yields the same elasticity no matter which price/quantity combination is the initial versus final
Given a demand or supply equation, more accurate price elasticity estimates result when smaller price changes are evaluated
Why demand elasticity for milk -.04
Milk doesn't have many subs, very inelastic, small budget shares, lots of things require
Calculate demand and supply equations by - equilibrium price and quantity
1) Set equal
2) Solve for Price
3) put back in for quantity
Given the demand equation (Q = 30 - 2P) calculate the price elasticity of demand at a market price around (-1%) a price of $10. Use the arc-price elasticity
1) Put $10 in the equation
2)Get 10 and put over price $10
3) Get 1 and multiple by number (+-) with variable
Consider the following supply equation Q=15 + 3P. What is the quantity supplied at the price of $5? What is the supply elasticity at that point
5/30 = .5
Peach vendor -2.5 elasticity, 100 pounds daily, change price from $1.00 to $1.04
4 * -2.5 = 10% decrease, 10 less
Elastic because, availability of substitute, not necessity
Under what circumstance does a supply elasticity for fresh peaches at +.02 makes sense
Short run - Inelastic, less storability
One word definition for elasticity
Responsiveness, Responsiveness, Responsiveness, Responsiveness, Responsiveness
Market demand curve is derived from
taking the horizon summation of the individual demand curve
If demand is inelastic, what happens to TR if the price decreases?
Elastic - TR and price move?
A movement along a supply curve results from a change in _____ and results in a change in _____
Price/demand and Quantity supplied
T/F If only the demand curve shifts, the result is both a change in demand and a change in quantity demanded
Suppose Ed = -2.0 for a particular is it
c) impossible to know
c) Ed doesn't tell us that
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Why are business decisions helped by the production function?