Study Session 4
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The Law of Demand
- The law of demand states that there is an inverse relationship b/w an item's price and the quantity.
- Demand curves slope downward.
- Two reasons why demand curves slope downward.
- 1. The substitution effect- As the relative price of an item increases, its opportunity cost increases and consumers will substitute cheaper alternative items for it.
- 2. The income effect- When the price of an item increases and nominal incomes remain unchanged, real incomes fall. When real incomes fall, consumers cannot afford to buy the same amount of products as before.
Difference b/w changes in demand and changes in the quantity demanded
- Changes in demand- An item demand only changes when the item's demand curve shifts either upward (to the right, increasing demand) or left ward (to the left, decreasing).
- Changes in the quantity demanded- A change in the quantity demanded of an item is depicted as a movement along its fixed demand curve.
- Reasons demand curve shifts...
- 1. Consumer prefrances
- 2. Population
- 3. Income
- 4. Expected future income
- 5. Expected future prices of the item
- 6. The price(s) of other items
The Law of Supply
- The law of supply states that there is a direct relationship b/w an item's quantity and the price.
- Supply curves slope upward
- A change in supply curve- an item's supply only chages when the supply curve shifts either downward to the right(increasing supply) or upward to the left (decresing supply)
- A change in the quantity supplied- The point moves along its fixed curve.
- Reasons a shift in supply curve includes a change in
- The number of supplies
- The prices of resources
- Expected future prices of the item
- The prices of other related items
The equilibrium Price and quantity
- The equilibrium price is the price at which the quantity demanded equals the quantity supplied.
- The equilibrium qunatity is the amount that is traded at the equilibrium price.
- Qunatity Supplied > Quantity demanded = Surplus => put downward pressure on the item's price.
- Quantity Demanded > Qua. supplied = Shortage => put upward pressure on the price
- The total satifaction that a consumer receives by consuming a certain goods, services or resource is called that item's total utility.
- Total utility increases as more is consumed, the amount of increase occurs at a diminishing rate. This is the law of diminishing marginal utility.
- Marginal utility is the additional utility that a consumer derives by consuming an additional unit of an item.
- MU= change in utility/ change in quantity
- Marginal utility curve is downward
The consumer's total utility is maximized when the marginal utility per dollar spent on one item equals the marginal utility per dollar on every other affordable market product.
The difference b/w the total utility and the value that he or she must pay for them reperesents an excess utility called the consumer surplus.
What is GDP(Expenditure Approch)
GDP = C (products bought by consumers) + I (Business) + G (Govt.) + (X(export)- M(import))
What is GDI (Income Approach)
- GDI= Wages + Rent + Interest + Indirect Busienss Taxes + Net income to foreigners + Depriciation + Profit
- GDP= GDI
Real Vs. Nominal(current) GDP
- Real GDPLY= Nominal GDPCY * (GDP Deflator BY/ GDP DeflatorCY)
- GDP deflator is different than Consumer Price Index. GDP deflator measures the chages on the braoder basket of goods and services produced domestically that compose the GDP.
- CPI is based on the prices of a baslet of goods and services typically purchased by urban consumers.
GNP= National Income + Indirect Business Tax + Capital Consumption = GDP - Net Income of Foreigners
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