Old Version- Micro Unit 2 Summary- Supply and Demand

Summary

In this microeconomics unit summary, Jacob Clifford provides a comprehensive review of essential concepts including demand, supply, elasticity, consumer and producer surplus, equilibrium, market shifts, and government interventions such as price ceilings, floors, taxes, and subsidies. He emphasizes understanding key ideas like how price changes affect market equilibrium, the impact of taxes on consumer and producer surplus, and how international trade influences domestic markets. With practical examples and clear breakdowns of topics, this video is designed to help students prepare for exams and master the foundational principles of microeconomics.

Takeaways

• 😀 Understand the inverse relationship between price and quantity for demand, explained through the substitution effect, income effect, and the law of diminishing marginal utility.
• 😀 Demand can shift due to five main factors: the price of related goods (substitutes and complements), income changes (normal vs. inferior goods), tastes, expectations, and the number of buyers in the market.
• 😀 Supply has an upward-sloping curve, reflecting a direct relationship between price and quantity supplied, where higher prices motivate producers to supply more due to profit incentives.
• 😀 The key supply shifters include changes in the price of resources, technology, taxes, subsidies, and the number of producers.
• 😀 Elasticity measures how sensitive quantity is to changes in price, with elasticity of demand, elasticity of supply, cross-price elasticity, and income elasticity as the four primary types.
• 😀 Demand elasticity can be categorized into perfectly inelastic, inelastic, unit elastic, elastic, and perfectly elastic. The total revenue test can help determine if demand is elastic or inelastic.
• 😀 Elasticity of supply operates similarly to demand elasticity but is influenced by factors such as the ease of production and availability of resources.
• 😀 Understanding the concept of equilibrium is crucial: when supply and demand intersect, consumer and producer surplus are maximized, indicating market efficiency.
• 😀 Price ceilings and floors are government interventions that affect market equilibrium. A binding price ceiling creates a shortage, while a binding price floor creates a surplus.
• 😀 Taxes shift the supply curve leftward, creating deadweight loss, and the burden of the tax depends on the relative elasticity of demand and supply, which determines who bears the tax burden.

Q & A

What is the law of demand, and why does the demand curve slope downward?

The law of demand states that as the price of a good or service increases, the quantity demanded decreases, and vice versa. The demand curve slopes downward because of the substitution effect, income effect, and the law of diminishing marginal utility, which cause consumers to purchase more when prices drop.

What are the five shifters of demand?

The five shifters of demand are: 1) Price of related goods (substitutes and complements), 2) Income (normal and inferior goods), 3) Tastes and preferences, 4) Expectations about future prices, and 5) Number of buyers in the market.

What causes the supply curve to slope upwards?

The supply curve slopes upwards because, as the price of a good increases, producers are willing to supply more of it due to the higher potential profit they can make.

What are the key shifters of supply?

The key shifters of supply include: 1) Price of inputs, 2) Technology, 3) Number of sellers, and 4) Expectations about future prices.

How is price elasticity of demand (PED) calculated, and what does it indicate?

Price elasticity of demand (PED) is calculated by dividing the percentage change in quantity demanded by the percentage change in price. It indicates how sensitive the quantity demanded is to a change in price. If PED is greater than 1, demand is elastic, meaning a small price change results in a large change in quantity demanded.

What are the differences between elastic and inelastic demand?

Elastic demand occurs when a small price change leads to a large change in quantity demanded, while inelastic demand happens when a large price change results in a small change in quantity demanded.

What is deadweight loss, and when does it occur?

Deadweight loss is the loss of total surplus that occurs when a market is not operating at equilibrium. It typically occurs when there is a price ceiling (e.g., rent control) or price floor (e.g., minimum wage), resulting in inefficiencies in the market.

How do price ceilings and price floors affect market outcomes?

Price ceilings, set below equilibrium, create shortages because demand exceeds supply at the lower price. Price floors, set above equilibrium, create surpluses because the higher price leads to excess supply.

What is the impact of government intervention, like taxes, on the market?

Taxes shift the supply curve to the left, increasing the price paid by consumers and lowering the price received by producers. This can lead to deadweight loss and reduce the total surplus in the market.

How does international trade impact consumer and producer surplus?

International trade typically increases consumer surplus by providing goods at lower prices. However, domestic producers may lose surplus due to competition from imports. Tariffs and quotas can distort these effects by raising prices and reducing the total surplus.