Review Sheet for Exam - Intermediate Macroeconomics Theory | ECN 100, Study notes of Microeconomics

Download Review Sheet for Exam - Intermediate Macroeconomics Theory | ECN 100 and more Study notes Microeconomics in PDF only on Docsity! University of California-Davis TA: Jason Lee ECN 100-Spring 2008 Quarter Email: jawlee@ucdavis.edu Handout 2 I. Review of Demand and Supply A. Demand Curve Definition: The demand curve shows how much product is purchased at every given price holding all other factors constant. The demand curve shows a negative relationship between price and quantity demanded (the demand curve is downward sloping).  If the price of a good changes we move along the demand curve for that good.  If any other factor that affects demand changes we shift the demand curve. Other factors that affect demand besides price: (1) Population Growth: The higher the population growth the greater the demand (2) Consumer Income: The higher the consumer income the greater the demand (3) Consumer Preferences: If consumers prefer a good, they will increase demand for that product. (4) Prices of other goods: a. Substitutes: If an increase in the price of good x leads to an increase in quantity demanded of good y we say that these goods are substitutes. Pepsi and Coca-Cola are examples of substitutes. b. Complements: If an increase in the price of good x leads to a decrease in quantity demanded of good y we say that these goods are complements. Hot Dogs and relish are examples of complementary goods. (5) Government Taxes and Regulations B. Supply Curve Definition: The supply curve shows how much product is purchased at every given price holding all other factors constant. The supply curve shows a positive relationship between the price and quantity supplied (the supply curve is upward sloping).  If the price of a good changes we move along the supply curve for that good  If any other factor that affects supply changes we shift the supply curve. Other factors that affect supply besides price: (1) Technology: An increase in technology allows suppliers to supply more at the same price. (2) Price of Inputs: An increase in the price of inputs will reduce supply. (3) Prices of Other Possible Products: An increase in the price of other goods, will reduce the supply of a particular goods as suppliers switch to produce the good with the higher price. (4) Government taxes and regulations Equilibrium price and quantity can be determined wherever the demand and supply curves intersect. C. Shifting the Demand and Supply Curves The following chart summarizes what happens to the equilibrium price and quantity if you shifted either the demand or supply curve. You should verify the results by drawing the supply and demand diagram and shifting each curve as indicated. You’ll find it will be a lot easier to draw the changes on a graph than memorize this table. Table 1: Effect on Price and Quantity if 1 curve shifts Shift Equilibrium Price Equilibrium Quantity ↑ Demand ↑ ↑ ↓ Demand ↓ ↓ ↑ Supply ↓ ↑ ↓ Supply ↑ ↓ The following chart summarizes what would happen to price and quantity if both curves shifted. Note in each case the effect of price or quantity will be ambiguous. Again, you should verify the results by drawing the supply and demand diagram and shifting the curves as indicated. Table 2: Effect of Price and Quantity if both Demand and Supply Simultaneously shifts Shift Equilibrium Price Equilibrium Quantity ↑ Demand; ↑ Supply Ambiguous ↑ ↑ Demand; ↓ Supply ↑ Ambiguous ↑ Supply; ↓ Demand ↓ Ambiguous ↓ Supply; ↓ Demand Ambiguous ↓ II. Elasticity From the previous section we have seen that changes in demand and supply results in changes in equilibrium price and quantity. However, in our analysis we could only show in which direction price and quantity would change. We could not tell anything about the magnitude of the change. Economists have introduced a concept called elasticity to provide a unit-free measure of the change. In general if X causes a change in Y, the elasticity of Y with respect to X measures the size of the change. Mathematically we can represent this as X YY X    % %  A. Price Elasticity of Demand Price elasticity of demand measures the change in quantity demanded caused by a change in price. Mathematically we can represent this as P Q dd p    % %  which we can rewrite as 1(a) Write an equation for the demand curve 1(b) Write an equation for the supply curve 1(c) Solve for the equilibrium and label this on the graph 1(d) How many golf lessons will be given if the price is $10? Will buyers or sellers be dissatisfied? Explain. 1(e) How many golf lessons will be given if the price is $30? Will buyers or sellers be dissatisfied? Explain. Question #2 Consider the following supply and demand function for the corn market. The demand curve is represented by the following function: MPPPQ butterpotatoescorn d corn 0003.025.0425  Where Qd is measured in billions of bushels of corn. The supply curve is represented by the following function: soybeansfuelcorn s corn PPPQ 25.1259  Where Qs is measured in billions of bushels of corn. (a) Suppose that the price of potatoes is equal to $0.75, the price of butter is $4 and average yearly income (M) is $40,000 a year. Graph the corresponding demand curve. (b) Using algebra determine at what price does the quantity demanded equals 15 billion bushels of corn. (c) Suppose that the price of fuel equals $2.75 and the price of soybeans is $10. Graph the corresponding supply curve. (d) Using algebra determine at what price does the quantity supplied equals 21 billion bushels of corn. (e) What is the equilibrium price and quantity? (f) Suppose that the price of fuel increases to $4.50. Calculate the new equilibrium price and quantity using algebra. Question #3 Suppose the demand function for corn is corn d corn PQ 220  and the supply function is 76.1  corn s corn PQ . (a) At the equilibrium price, calculate the price elasticity of demand. (b) At the equilibrium price, calculate the price elasticity of supply. Question #4 Suppose the market for oranges is represented by the figure below. (a) What is the price elasticity of demand for oranges at a price of $2.35 a box? (b) What is the price elasticity of demand for oranges at a price of $3.49 a box? Question #5 Suppose that the equation for a linear demand function was Qd = 431.6 – 80.7P. At what price will the total expenditure on oranges be the largest?