Priniciples of Economic Price Theory
Notes
Factors affecting demand: * Price of Substitutes- An increase in the price of a good’s substitute will increase demand for the good. * Price of Complements- An increase in the price of a good’s complement will decrease demand for the good. * Consumers’ Income- A rise in income increases the demand for normal goods and decreases the demand for inferior goods. * Consumers’ Expectations- If consumers expect a product’s quality to increase in the near future, they will have a lower demand for the product today. Vice versa.
Chapter One: Price Theory * Economics is based on incentives. People respond to incentives. * If the price of Pepsi increases, people realize they must give up more of other goods when they buy another Pepsi. * Scarcity = finite resources and infinite wants, we must make choices. Scarce resources have positive opportunity costs. * Opportunity Cost = highest valued alternative use of any resource (what we give up). * Production Possibilities Curve: On the line is efficient, using all of our productive resources. At points A or B, we must give up some of one to make more of the other. Inside the line is inefficient. At point C there are clear gains (at least as much of one good and more of the other). If we knew preferences, we could compare A and B (prices give us such info). Because C is inefficient, it does not mean any point on PPC is preferred to C (example is D). [Figure 1] * Wealth is increased via innovation, specialization, and markets (markets allow specialization and exchange). [Figures 2,3]
Chapter Two: Supply and Demand * Quantity demanded is inversely related to price (p). We get the market demand by adding individual demands. * What affects how much people want to buy? 1) Price of the Good 2) Price of Related Goods 3) Income 4) Preferences 5) Number of Consumers * Price of Related Goods: Substitutes (coke and pepsi), complements (chips and salsa).
Factors affecting demand: * Price of Substitutes- An increase in the price of a good’s substitute will increase demand for the good. * Price of Complements- An increase in the price of a good’s complement will decrease demand for the good. * Consumers’ Income- A rise in income increases the demand for normal goods and decreases the demand for inferior goods. * Consumers’ Expectations- If consumers expect a product’s quality to increase in the near future, they will have a lower demand for the product today. Vice versa.
Chapter One: Price Theory * Economics is based on incentives. People respond to incentives. * If the price of Pepsi increases, people realize they must give up more of other goods when they buy another Pepsi. * Scarcity = finite resources and infinite wants, we must make choices. Scarce resources have positive opportunity costs. * Opportunity Cost = highest valued alternative use of any resource (what we give up). * Production Possibilities Curve: On the line is efficient, using all of our productive resources. At points A or B, we must give up some of one to make more of the other. Inside the line is inefficient. At point C there are clear gains (at least as much of one good and more of the other). If we knew preferences, we could compare A and B (prices give us such info). Because C is inefficient, it does not mean any point on PPC is preferred to C (example is D). [Figure 1] * Wealth is increased via innovation, specialization, and markets (markets allow specialization and exchange). [Figures 2,3]
Chapter Two: Supply and Demand * Quantity demanded is inversely related to price (p). We get the market demand by adding individual demands. * What affects how much people want to buy? 1) Price of the Good 2) Price of Related Goods 3) Income 4) Preferences 5) Number of Consumers * Price of Related Goods: Substitutes (coke and pepsi), complements (chips and salsa).