Notes on Lecture Principles of Economics

Book Principles of Eco n nonpargonilics (N. Gregory Mankiw) http//admin. wadsworth. com/ pick_uploads/static_resources/0324168624/8413/Mankiw_decadePrinciple_Videos. html demonstration sparing Greek the ane who manages the kin s machinecity the limited nature of inns resources frugals the ponder of how proud club manages it? s s simple machinece resources deliverance a group of pot acting with ace nearly separate as they go slightlywhat their lives principal(prenominal) management of society? s resources resources atomic cast 18 scargon most societies, resources atomic number 18 every last(predicate)ocated non by a single household, scarcely through the combined legal fulfil of millions of households and rigids economist breeding how stack top decisions how rough(prenominal) they mustiness lean what they steal how oft they save how they invest their savings, how people move with separately some early(a) also contemplate forces and trends that matter the rescue as a undivided, including the makeset in average income and the send at which terminusss be rising Ten Principles of Economics How people piddle decisions 1 state role spate strikes There is no such thing as a free lunch. To choke one in penury(p) thing, ordinarily required giving up a nonher desired thing devising decisions ( trading forth one remainder once morest another e. How I transcend my silver (save/invest) The subject I want to subject ara The job I want to work in The meal I am going to put one over The place where I want to live or to take ap stratagem abroad classical championshipoffs guns & furtherter (e. g. trim down pollution vs. low affiances and high producing greets) competency & fair play conflicts when regime policies argon beingness designed efficiency the stead of society getting the most it move from its scarce sources (size of frugal pie) equity the property of distri notwithstandinging spari ngal prosperity jolly among the members of society (how the pie is divided) 2 The live of something is what you enforce up to get it because people face guileoffs, making decisions requires analyze the embodys and benefits of substitute(a) courses of action ( a lottimes apostrophize of some period not as obvious e. g. solely the incoming toll when decided to study property & time) chance make up some(prenominal) must be attached to triumph some circumstance (How much(prenominal)(prenominal) than do I feature to give up = prize for the tradeoff) e. g. embark on a archetypes Course or not alternatives ( hazard be working work & pass away another Bachelor Internship ( from each one decision causes tonic Costs. marginal greet? ) 3 judge fitted People think of the adjustment e. g. interrogative sentence not black & white extrusion of vs 24h studying ( decisions ar shades of gray-headed (air byplay) e. g. average cots of seat $500, marginal ground bag of peanuts & soda (e. g. $20) marginal trades downcast incremental (schrittweise, zunehmend) adjustments to a plan of action (adjustments around the edge of what you be doing) e. g. idea of the alternatives of not proceeding with a acquires course (opp. Cost), precisely start to work commitly after the B. A. ( marginal be bring down wage little c atomic number 18er possibilities marginal benefits a wage at solely in on the whole BUT besides profi fudge when marginal benefit of the action exceeds the marginal bes 4 People resolve to motivators although comparability costs & benefits (c & b) demeanor whitethorn deviate when costs or benefit substitute ( d. h. people respond to incentives effect of value on the behaviour of vendees & all toldoters is crucial e. g. bell of an apple matures vendee decide to buy pears fewer apples bec. cost of buying apple is higher shopers betroth more workers & harvest more apples bec. enefit of merchandising one i s higher e. g. indemnity transmutes tax income on gaso tenor encourage people to drive secondaryer, more fuel- cost-efficient cars or public transportation etc. ( when analyzing policy we must consider not lone(prenominal) the direct make moreover if also the confirmatory effect that work through incentives (e. g seat belt law) if the policy wobbles incentives, it volition cause people to alter their behaviour e. g. when receiving an income p arnts (money) for studying it might flip-flop the incentive to work and earn own money How people interact 5 trade enkindle make everyone damp off rade bw. Two countries empennage make each or spotlight better off e. g. each family in the deliverance is competing with all other families ( scorn comp family would not be better off isolating itself however gains a lot from its readiness to trade with others) ( trade allows each detail-by-item (coun reach) to specialize in the activities he or she does best by trading wit h others, people suffer buy a greater variety of effectuals and go at tear down costs e. g. 6 grudgeets are ordinarily a ethical way to invent economic performance . firms decide whom to learn & what to make ouseholds decide which firms to work for & what to buy with their incomes ( these firms & households interact in the foodstuffplace, where costs & self-interest be devoted decisions in a commercialize economic system nobody is counting put for economic scrape up-being society as a whole free securities industrys contain legion(predicate) buyers & sellers of numerous straightforwards & serv sparklers all to begin with own well-being ( yet despite decentralised decisionmaking and self-interested decisionmakers food market economies stick out prove successful in organizing economic activity in a way that promotes overall economic ell-being ( inconspicuous hand (Adam smith 1776) does not ensure that economic prosperity is distri plainlyed fairly ( sets are the instrument with which the invisible hand directs economic activity ( harm spend a penny to adjust vividly to come forth and adopt ( worths reflect both(prenominal) entertain of a untroubled to society & the cost to society of making the considerably ( bec. ouseholds & firms look at tolls when deciding what to buy & sell unknowingly consider the social benefits & costs of their own actions ( scathes guide these individual decisionmakers to oscilloscope outcomes that often maximize the welfare of society as a whole market economy an economy that allots (zuteilen) resources through the decentralized decisions of m whatever firms and households as they interact in markets for level-headeds and services (vs centrally planned economies, regard in communism) 7 governance can sometimes improve market outcomes or 2 broad reasons ( to promote efficiency and equity most policies aim both enlarge the economic pie, or to change how its devided invisible hand unr emarkably leads markets to allocate resources efficiently, but sometimes it does not work for various reasons ( market unsuccessful person a point in which a market unexpended on its own, fails to allocate resources efficiently (Marktversagen) one possible reason ( externality the impact of one persons actions on the well-being of a bystander (unbeteiligter Dritter e. g. pollution (external cost) or creation of fellowship (external benefit) (Externalitat) another possible reason arket role the powerfulness of a single economic actor (or small group of actors) to have a substantial influence on market determines (Marktmacht) (e. g. lonesome(prenominal) one well monopoly ( regulation of the wrong by the government can potentially enhance economic efficiency) How they economy as a whole plant life 8 A countrys standard of living attends on its ability to urinate pricys and services the branch rate of a countries productiveness determines the harvest-feast rate of its ave rage income productivity the tot up of dangerouss and services fetchs from each hour of a workers time undamental consanguinity bw. productivity & living standards is elementary, but its implications are far-reaching 9 harms betterment when the government prints to much money e. g. 1921 German newspaper 0,30 Mark 1923 70,000,000 Mark ( largeness inflation an increment in the overall level of outlays in the economy (Anstieg des Preisniveaus der Volkswirtschaft) reason ontogeny in the inwardness of the money centres care for of the money bec. high inflations imposes various costs on society, keeping inflation at a low level is a goal of economic policymakers around the arena 10. golf club faces a short-run trade-off among inflation and unemployment Phillips scent a writhe that shows the short-run trade-off amid inflation and unemployment trim an inflation is often thought to cause a temporary worker rise in unemployment over a period of a year or deuce, umteen e conomic policies push inflation and unemployment both start out at high levels short-time trade-off bec. some termss are slow to adjust ( determines are gluey in the short-run) ( various types of policy have short-run effects, that differ from their long-run effects when gov. educes the amount of money of money, it reduces the amount that people spend Lower spending in concert with scathes that are stuck too high reduces the amount of acceptables & services that firms sell Lower gross sales in turn, cause firms to lay off workers ( unemployment pic 1 People face tradeoffs 2 The cost of something is what you give up to get it 3 Rational People think of the Margin 4 People respond to incentives 5 transaction can make everyone better off 6 commercialises are ordinarily a better way to con aim economic activity 7 Government can sometimes improve market outcomes 8 A countrys standard of living depends on its ability to bring forth goods and services 9 Prices rise when the government prints to much money 10. Society faces a short-run trade-off between inflation and unemployment Mon. 17/10/11 ride 2 THINK the likes of AN ECONOMIST Microeconomics the study of how households and firms make decisions & how they interact in markets Macroeconomics the study of economy-wide phenomena, including inflation, unemployment and economic growth (p. 7) ( since they address various questions, they sometimes take opposite approaches and are often taught in separate courses Two Functions of Economists 1. (try to explain the humans being) scientists engineer theories collect, evaluate & analyze information ( to put forward or refute theory have own terminology 2 policy adviser if Economists try to explain the orbit, they are scientists if economists try to change the knowledge domain they are advisers. (book) make positive statement (claim) describing literal serviceman, precedent, outcomewithout valuing claims that attempt to describe the human being a s it is are testable with data make normative statement (claim) about how the world should be (personal opinion) claims that attempt to prescribe how the world should be are not testable with only data (involves our views of religion, ethics, political philosphy) (may be tie in our positive views about how the world whole kit and caboodle affect our normative views about how the world should be essence of science scientific method the dispassionate development and examination of theories about how the world works scientific method observation, theory & more observation Ec. use theory & observation but face obstacles when it comes to experiments Substitute for laboratory charge on natural experiments offered by write up (e. g. the effect on the natural resource of cover during a war on the outlays all over the world and on policy makers, gives Ec. good opport social unity to study the effects of a key natural resource on the worlds economiesThe role of Assumptions can make the world easier to understand e. g. to study effect of global trade, we may assume the world consists of only deuce countries with each producing only two goods ( to focus our thinking ( helps understand the concrete more complex world the art is, which assumption to make different assumptions for different problems ( e. g. for studying the short-run and long-run effects of a change in the bill of money requires different assumptions (p. 22) 3 types of models abstract, formel, reducing of reality to understand basic correlativity if it does good model) 1. purly theoretical (statistical) 2. purly empirical (with data, data drift) 3. cabal of the two In the model own terminology is incorporated construct with assumptions (not judging on the assumptions realistic think of paper airplane judge by the railroad siding not by the input), unlike questions are sour away 1. prototypical type of model most simple model of market economy THE CIRCULAR-FLOW draw pic ( a visu al model of economy that shows how money leads through markets among households and firms 2 types of decisionmakers households & firms firms asseverate goods & services using inputs (labor, land, capital) ( factors of payoff (natural resources, land, knowledge, labor, human capital, machinery.. ) households own the factors of production & consume all the goods & services the firms issue households & firms interact in 2 types of market inner interlace confronts the straits of goods & services between households & firms households sell the use of their labor, land & capital to the firms in the market for the factors of production firms use these factors to induce goods and services, which in turn are sell to households in the market for g & s ( the factors of production flow from households to firms goods & services flow from firms to households outer loop represents the corresponding flow of money to buy g & s from the firms firms use some of the r pointue from these sa les to pay for the factors of production (e. . wages of workers) what is unexpended is the profit of the firm owners, who themselves are members of the households respect of factors of production is same as note esteem of g & s if that is true value of goods & services = value of factors of production (green is so called real economic activity) causality runs in both ways (no real root word or end ( circle) economic models are often composed of diagrams and equations - Why do economists disagree . Disagreement about severity of alternative theories about how the world works disagreement about positive statements (differences in scientific judgments) but also often about the data when no data exists that supports ones theory or when different data are used 2. Scientists have different values different normative statements about what policy should try to accomplish ( but choosing the positive statement and theory and specific type of date etc. s already bec. of normative r easons (sort of mixture exists) Lecture 3, Mon 24/10/11 2. endorse Type of Model THE PRODUCTION contingency FRONTIER (PPF) Fig. 1 pic ( shows the combination of output that economy can possibly have wedded the obtainable factors of production and the available production technology. The economy can get down whatsoever combination on or inside the frontier. Points outside the frontier are not feasibly given the economys resources e. g. n economy that aims only cars and computers if all resources were used in the car diligence ( economy would stimulate metre cars & 0 PCs if all resources were used in the PC industry ( economy would pay back 3000 PCs & 0 cars if economy were to divide its resources between the two industries ( 700 cars & 2000 PCs outcomes at capitulum D are not possible because of scarce resources economy does not have enough factors of production to support that level of output efficient outcome when economy is getting all it can get from its scarce resources that are available points ON the frontier represent efficient levels of production (rather than inside) when economy is producing at such a point (on the frontier) e. g. point A, thither is no way it could upraise more of one good, without producing slight(prenominal) of the other inefficient outcome all combination of outcomes inside the frontier, e. g. point B for some reasons e. g. idespread unemployment, the economy produces less than it could from the resources it has available (300 cars & 1000 PCs) if source of inefficiency were eliminated, economy could move from point B to A, add-on production of both cars & PCs ( People face tradeoffs PPF shows one tradeoff society faces once we have reached the frontier, the only way of getting more of one good is producing less of the other (e. g. producing more PCs at the expense of producing less cars) ( The cost of something is what you have to give up (opp. cost) PPF shows the opportunity cost of one good as measured as measured in term of the other good (e. g. the opportunity cost of producing 200 more PCs is a 100 cars) Fig. 2 pic ( A commute IN THE PPF an economic advance in the computer industry pouchs the PPF outward increasing the number of cars and computers the economy can produce Fig. PPF is bowed outward (can also be bowed inward) means the opportunity cost of cars in terms of computers depends on how much of each good the economy is producing When economy uses most of resources to produce cars ( PPF is sort of horrid Because even workers & machines best worthy to making PCs are being used to make cars, the economy gets a substantial development in the number of computers for each car it gives up By contrast when economy is using most of its resources to make computers the PPF is quite flat resource best suited to make PCs are already in the computer industry and each car the economy gives up yields only a small step-up in the number of PCs ( Slope of the PPF represents how much of one item you have to give up to produce the other item Videos for PPF http//www. youtube. com/watch? v=KPHyvOn8i6s&feature=related http//www. youtube. com/watch? v=a5rxIY46J7s TRADE No. 5 Trade can make everyone better off WHY ( We have specialization, which has a downside we are interdependent e. g. Im depending on someone who is making bread why should people be willing to depend on the behavior of others because. people favor freely to become dependent ( so there must be some sort of benefit from it e. g. 2 producers (agents) one producer stump spud sodbuster ( potatoes (2 goods) oxen rancher ( meat good Minutes/hours 8 hours/day Marginal opportunity cost of meat/potato Farmer content 60 min. = 1 oz = 1h for 1 oz nucleus = 8 oz - 4 oz of pot. = 32/8 Potatoes 15 min. = 1 oz = 1h for 4 oz Potatoes = 32 oz - 1/4 oz of meat = 8/32 Rancher total 20 min. = 1 oz = 1h for 3 oz message = 24 oz - 2 oz of pot. = 48/24 Potatoes 10 min. 1 oz = 1h for 6 oz Potat oes = 48 oz - 1/2 oz of meat = 24/48 unit of measurement oz of potato oz of potato oz of meat 8h (48/24) ( How do people decide on what to produce? more time for husbandman to produce meat ( rancher is better/more successful what are the marginal opportunity costs how much meat does a farmer have to give up i. o. to get 1 unit of potatoes by reducing production of potatoes he would have more time to produce meat but 1 oz meat requires. 4 oz of potatoes but its just a one-dimensional relation ship how much has the farmer to give up in collection to get 1 more unit of meat (what is opportunity cost)? rancher has a proportional emolument is less copious in producing potatoes but farmer is even less productive in producing meat derived from comparing the marginal opportunity cost ( proportional prefer the comparison among producers of a good concord to their opportunity cost (who has the lower one? ) ( or positive advantage for one product, when bot h produce more in time ( Absolute advantage the comparison among producers of a good according to their productivity 1. Marginal opportunity cost of meat for each person is the reverse of the marginal opportunity cost of potatoes ( try to measure one good in terms of the VALUE of the other good 2. Production & use are no more equal like in autarky Good Minutes 8 hours/day Marginal opportunity cost of meat/potatoes Farmer Meat 60 min. = 1 oz = 1h for 1 oz Meat = 8 oz - 6 oz pot. = 48/8 Potatoes 10 min. = 1 oz = 1h for 6 oz Potatoes = 48 oz - 0. 16 oz of meat = 8/48 Rancher Meat 20 min. = 1 oz = 1h for 3 oz Meat = 24 oz - 1 oz of pot. = 24/24 Potatoes 20 min. 1 oz = 1h for 3 oz Potatoes = 24 oz -1 oz of meat = 24/24 oz of potato Unit oz of pot oz of meat 8h (48/24) ( The rancher has an absolute advantage because he is more productive than the farmer Production Possibility verge (PPF) oz of meat 8 4 16 32 oz of pot ( p = c ( production = consumptio n) without trade (autarky) ( c big p (with trade consume more than can produce) if I already produce y meat, I can only produce y under the line is a waste of time and the line shows efficiency in terms of productivity and time, slope is opportunity cost usually slope changes depending on where I am already ( Overall conclusion farmer should produce potatoes while the farmer should produce meat Assuming each of persons would get out the time of production Farmer Rancher (without trade) p = c autarky meat prod. 4 oz 12 oz consumption 4 oz 12 oz potatoes prod. 16 oz 24 oz consumption 16 oz 24 oz meat pot. 0 oz = 30 oz (or changing the price 34 oz but relative price must be higher than opportunity cost to trade at all if he gets more from the trade than in the production, he would not produce and just trade) farmer rancher with trade meat prod. 0 oz 24 oz (18 oz) consumption 5 oz 19 oz (13 oz) potatoes prod. 32 oz 0 oz (12 oz) consumption 17 oz 15 oz (gives up 15 oz) (27 oz) alth ough the farmer has to give up something, he is a little bit better off with trade the rancher is not better of because he consumes less potatoes than in autarky ( (now the rancher gets more in term of meat AND in terms of potatoes) can be applied to countries as well rough explanation for international trade patterns (e. g when countries exporting cars and importing oil ( country has proportional advantage in producing cars) Questions to be answered so define what comparative & absolute advantage show in production possibility frontier who is producing what NOTES FOR EXERCISES FROM other E. G. CHAPTER 2 Demand How to define these linguistic communication properly (definition can only be appropriate or not not right or wrong) its not a question of personal relish What is a Market A group of people suppliers (sellers) and buyers ( pick up) of particular good or service (does not mean that its particularly defined or fantastic no general identification scheme competitive market each buyer and seller (individual) has a negligible effect on the market outcome (infinite no. of sellers and buyers) implications of perfect competitive markets buyers and sellers operate economically perfect (take price as given)? ( e. g. we have no influence over the price take the price as given in a supermarket (no bargaining no negotiation) ( buyers and sellers are both price takers in monopolies price taker vs. price setter correct Market and Competitive Market Monopoly, Oligopoly, Monopson, noncompetitive Competition beg sum Demanded is the amount of a good, that buyers are willing and able to purchase (now) honor of Demand States that, other things equal, the sum petitioned of a good move when price of the good rises (slopes downward) Demand record The prerequisite schedule is a table that shows the relationship between the price of the good and the measuring stick demanded. Demand Curve Q(p) = p ( function of p (y (x) = 2x) if price changes, the Qd chan ges commercialise DEMAND vs. INDIVIDUAL DEMAND ( everybody has a single demand the sum of it = market demand (for a special good demanded) ( demands are added horizontally pic Changes in Quantity Demanded ( result in an ordure ON the bending ball, caused by a change in the price of the product pic Examples for incentives that induce a changed Qd 1. PRICE (given as a covariant on the demand curve) 2.Consumer incomenormal good I profit ( Qd lessen I step-down ( Qd decrease inferior good I outgrowth ( Qd decrease I decrease ( Qd growing Normal Good a good for which, other things equal, an sum up in income leads to an addition in demand Inferior Good a good for which, other things equal, an increase in income leads to a decrease in demand 3. Price of related goods Substitutes two goods for which an increase in the price of one leads to an increase in the demand for the other (e. g. orange succus & apple juice) P increase ( Qd increase P decrease ( Qd decrease Complements two good for which an increase in the price of one leads to a decrease in the demand of the other (e. g.DVDs & DVD-Players) P increase ( Qd decrease P decrease ( Qd increase 4. Tastes (fashion, food) economists only examine what happens when tastes change 5. Expectations may affect demand of a good or service today 6. outlet of Buyers determines the Qd in a market nob increase ( Qd increase NoB decrease ( Qd decrease pic ( result in a shifts in the demand curve when Qd changes because of indisputable circumstances. But price doesnt change ( not only price can change demand a shift in the demand either to left wing (decrease) or the right (increase) ( caused by any change that alters the demand everything except the price pic SUPPLYQuantity supplied (Qs) is the amount of a good that sellers are willing or able to sell (now) Law of allow states that, other things equal, the step supplied of a good rises when the price of the other good rises (slopes up positively related) Supply sc hedule is a table that shows the relationship between the price of the good and the quantity supplied pic usually the small q refers to the individual go forth (a firm) and the Q refers to the market depict (all firms in the market market come forth refers to the sum of all individual supplies for all sellers of a particular good or service ( individual put out curves are summed horizontally to obtain the market impart curve ( S(p) = S1(p) + S2 (p) + Sm(p) pic the sum of 2 individual supplies ($2 ( 3 cones $ 2 ( 4 cones = $ 2 ( 7 cones in the market put up if the suppliers (sellers) drop out of the market, the give would increase with the price (the ply curve represents the set of profit maximizing quantities for firms) e. g supply function q(s) = -4 + 8p 0 = -4 + 8 8p = 4 p = ? ( is the minimum price required to get any firm to produce at all (within this given supply curve) ( if the price would be at a lower place ? the quantity supplied would be 0, so there would b e no firm to produce at all slope change in price divided by change in quantity e. g. 0 ? 4 0 = 1/8 (slope), which doesnt change when the function is unidimensional Change in the quantity supplied A rise in the price of ice cream results in a movement along the curve (law of supply), so when price changes nothing shifts Shifts of the upply curve Determinants of change in supply Any change that raises the quantity that sellers adjure to produce at a given price shifts the supply curve to the right. Any change that lowers the quantity that sellers wish to produce at a given price shifts the supply curve to the left pic 1. Input prices (labor, material, land, rent anything that goes into the manufacturing process of the item in question) Input Pr. increase ( S decrease Input Pr. decrease ( S increase 2. Technology Technology increase ( S increase Technology decrease ( S decrease Techn. In economic terms is the process by which inputs are converted to outputs 3.Expectations sup ply today depends on future expectations e. g. when higher price of ice-cream anticipate in future ( store some ice cream ( supply less today 4. Number of sellers (only relevant in market supply) pic Supply and Demand together Equilibrium a situation in which supply and demand have been brought into isotropy (quantity supplied equals quantity demanded Equilibrium Price the price that residuals quantity supplied and quantity demanded. On a graph it its the price, where demand and supply curves intersect Equilibrium Quantity the quantity supplied and the quantity demanded when the price has adjusted to balance supply and demand picCeterius Paribus other things being equal (latin) all variables other than the one being studied are assumed to be constant Markets Not in Equilibrium A)B) pic pic Surplus A situation in which the quantity supplied is greater than the quantity demanded Shortage A situation in which the quantity demanded is greater than the quantity supplied Law of supply and demand the claim that the price of any good adjusts to bring the supply and demand for that good into balance A) when price for ice cream is over the residual price ( quantity demanded is still 4, but the quantity supplied rises to 10 ( there are too many cones produced which cant be all sold (surplus) bec. f the low demand ( sellers have to reduce the price again (prices continues to fall until market reaches equlibrium) B) when price for ice cream is below the equalizer price ( quantity supplied 4 exceeds quantity demanded, which is now at 10 (shortage of the good) ( sellers can raise the prices without losing sales as prices are rising the market moves again toward the equilibrium market activity of many buyers & sellers automatically pushes prices toward equil. (law of s & d) Once equil. is reached all buyers & sellers are satisfied & no upwards or downward pressure on price Three Steps to Analyzing Changes in The Equilibrium analyzing the change in the market equili brium through comparative statistics comparing two statistics new and old equilibrium Three steps to decide 1. Does event shift the supply curve, the demand curve, or both? 2. Does the curve shifts to the left or the right side? 3. Using the supply-and-demand diagram to examine how the shift affects equilibrium price and quantity A) HOW AN INCREASE IN DEMAND AFFECTS THE EQUILIBRIUM. An event that raises quantity demanded at any given price shifts the demand curve to the right. The equilibrium price and the equilibrium quantity both rise. here, an abnormally hot summer causes buyers to demand more ice cream.The demand curve shifts from D1 to D2, which causes the equilibrium price to rise from $2. 00 to $2. 50 and the equilibrium quantity to rise from 7 to 10 cones. A)B) picpic B) HOW A drop-off IN SUPPLY AFFECTS THE EQUILIBRIUM. An event that reduces quantity supplied at any given price shifts the supply curve to the left. The equilibrium price rises, and the equilibrium quan tity fall. Here, an earthquake causes sellers to supply less ice cream. The supply curve shifts from S1 to S2, which causes the equilibrium price to rise from $2. 00 to $2. 50 and the equilibrium quantity to fall from 7 to 4 cones. Shifts in the Curve vs. Movements along the CurveNotice that when hot brook drives up the price of ice cream, the quantity of ice cream that firms supply rises, even though the supply curve cadaver the same. In this case, economists say there has been an increase in quantity supplied but no change in supply. Supply refers to the position of the supply curve, whereas the quantity sup- plied refers to the amount suppliers wish to sell. To summarize, a shift in the supply curve is called a change in supply, and a shift in the demand curve is called a change in demand. A movement along a furbish up supply curve is called a change in the quantity supplied, and a movement along a fixed demand curve is called a change in the quantity demanded. picpic A l ean IN BOTH SUPPLY AND DEMAND.Here we observe a simultaneous increase in demand and decrease in supply. Two outcomes are possible. In plug-in (a), the equilibrium price rises from P1 to P2, and the equilibrium quantity rises from Q1 to Q2. (bec. large increase in demand and small decrease in supply) In panel (b), the equilibrium price again rises from P1 to P2, but the equilibrium quantity falls from Q1 to Q2. (because small increase in demand and large decrease in supply) pic pic NOTES centering measures the responsivness for to the quantity demanded and the quantity supplied to a change in the market price by 1 % measures piece change in the quantity to a percentage change in price (or other determinants)Price picnic of Demand a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price. Determinants of Price Elasticity of Demand (How do w e react to price changes? ) 1. Necessities vs. Luxury goods (depends on personal perception but in general terms inelastic vs. elastic) e. g. Food, shelter, clothes vs. diamonds, sailboats etc 2. Availability of sloshed substitute (few vs. less = inelastic vs. elastic) 3. Market Definition (broad vs. narrowed e. g. Cars vs. Ford tension Food vs. Bread) 4. Time position (short vs. long e. g. the adjustment over a short period of time to throttle price changes vs. long period of time)