Demand and Supply Graphs

Original Demand and     Supply Graph

Price Ceiling & Price Floor Graph

Price Floor - Sets a minimum amount to be paid for a good or service. It stops prices from dropping to equilibrium. It can create a surplus, and happen above equilibrium. In absence of the floor, prices would go down, increasing the quantity demanded and decreasing the quantity supplied until they are equal.  

• Ex. : Minimum wage.

Price Ceiling -  Sets a maximum price that could be legally charged for good or service. It stops prices from rising to equilibrium. It can create a shortage, and happen below equilibrium.  In absence of the ceiling, prices would go rise, reducing the quantity demanded and increasing the quantity supplied until equilibrium is reached.  

• Ex. : Rent control.

Supply Formulas

1. Total Revenue  = Price x Quantity 
2. Marginal Revenue  = New TR - Old TR 
3. Total Cost  = Total Fixed Cost + Total Variable Cost
4. Marginal Cost  = New TC - Old TC 
5. Average Fixed Cost  = TFC / Q  
6. Average Variable Cost = TVC / Q 
7. Average Total Cost  = AFC + AVC 
                                  =TC / Q 

Elasticity of Demand Practice Problems

Example 1.) Katherine advertises to sell cookies for $4 a dozen. She sells 50 dozen, and decides that she can charge more. She raises the price to $6 a dozen and sells 40 dozen. What is the elasticity of demand? Assuming that the elasticity of demand is constant, how many would she sell if the price were $10 a box?

Example 2.) Yesterday, the price of envelope was $3 a box, and Julie was willing to buy 10 boxes. Today, the price has gone up to $3.75 a box, and Julie is now willing to buy 8 boxes. Is Julie's demand for envelopes elastic or inelastic? What is Julie's elasticity of demand?

Unit 1 - Jan 17

Elasticity of Demand - A measure of how consumers react to a change in price.

• Elastic Demand - Demand that is very sensitive to a change in price. Greater than 1.
• Substitute and luxury goods.
• Ex. : Cars, sodas, and meat 
• Inelastic Demand - Demand that is not very sensitive to a change in price. Less than 1.
• Few substitute and a necessity.
• Ex. : Gas, insulin, and water.
• Unitary Demand - Equal to 1.

How to Calculate Price Elasticity of Demand.

• Step 1 : Change in quantity.
• (new - old) / old
• Step 2 : Change in price.
• (new - old) / old
• Step 3 : P.E.D = change in quantity.
• step 1 / step 2 

Determinant of Demand & Supply

Supply and Demand

Unit 1 - Jan 10

Law of Increasing Opportunity Cost

• When resources are shifted from making one good/service to another.
• The cost of producing the second item increases.
• Occurs because not all resources are equally suited for the production of all goods and services. 

4 keys assumption of the possibility graph.

1. Only 2 products can be produced.
2. Full employment of resources.
3. Fixed resources - Land, labor, and capital.
4. Fixed technology.

Production Possibility Graph

Point A- Inside the curve, attainable but inefficient. Caused by war, famine, and unemployment.

Point B & C - On the frontier, attainable but efficient. 

Point D - Outside the curve, unattainable. Caused by technology and economic growth.

Unit 1 - Jan 9

Factor of Production

1.     Land- natural resources.

2.     Labor- work force.

3.     Capital- 1.)Human Capital- knowledge and skill a worker gain through experience and education. 2.)Physical Capital- human made object used to create other goods and services.

4.     Entrepreneurship- risk-takers and inventive.

Opportunity Cost- the most desirable alternative given up by making a decision. 

Production Possibilities Graph (PPG)-  show all alternative ways to use resources. The graph as a whole.

Production Possibilities Frontiers (PPF) &Production Possibilities Curve (PPC) are the same.

Productive Efficiency vs. Allocative Efficiency

• Productive Efficiency- produce resources at the lowest cost. Any points on the curve.
• Allocative Efficiency- combination most desire by society, where to produce on the curve.

Unit 1 - Jan 8

Macroeconomics- The study of the major component of the economy.

Ex.) Inflation, GDP, unemployment, supply & demand.

Microeconomics-  The study of how households and firms make decisions and they interact in market.

          Ex.) Supply & demand and market structure.

Positive vs. Normative

• Positive- attempt to describe the world as it is (Fact). 
• Ex.) Minimum wage causes unemployment.
• Normative- attempt to prescribe how the world should be.
• Ex.) Government should raise money....

Wants vs. Needs

• Wants- desire of citizens.Broader than our need.
• Needs- basic requirement for living.

Scarcity vs. Shortage

• Scarcity- most fundamental economic problems that all society faces. Satisfy unlimited wants with limited supplies.
• Shortage- situation in which quality demand is greater than quality supplied.

Goods vs. Services

• Goods- tangible commodity.
• Consumer goods- intended for final use by consumers.
• Capital goods- items used in the creation of other goods (Machinery).
• Services- work that is performed for someone else.