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demand curve
a function that shows the quantity demanded at different prices.
a function that shows the quantity that demanders are willing to buy at different prices
- ex:
- The demand curve tells us, for example, that at a price of $55 per barrel buyers are willing and able to buy 5 million barrels of oil a day or, more simply, at a price of $55 the quantity demanded is 5 million barrels a day (MBD).
a demand curve shows how customers respond to higher prices by buying less and to lower prices by buying more
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quantity demanded
the quantity that buyers are willing and able to buy at a particular price.
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values of the usage of oil
When the price of oil is high, consumers will choose to use oil onlyin its most valuable uses (e.g., gasoline and jet fuel). As the price of oil falls, consumers will choose to also use oil in its less and less valued uses (heating and rubber duckies).
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the law of demand
The lower the price the greater the quantity demanded
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consumer surplus
the consumer’s gain from exchange, or the difference between the maximum price a consumer is willing to pay for a certain quantity and the market price.
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total consumer surplus
measured by the area beneath the demand curve and above the price.
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calculating consumer surplus
the area of a triangle is ((height * base)/2) . The height of the consumer surplus triangle is $60 = $80 – $20 and the base is 90 million barrels so consumer surplus equals $2,700 million ($60 × 90 million/2).
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An increase in demand shifts the demand curve...
outward, up and to the right.
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A decrease in demand shifts the demand curve...
inward, down, and to the left.
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important demand shifters
- Income
- Population
- Price of substitutes
- Price of complements
- Expectations
- Tastes
“What would make people willing to buy a greater quantity at the same price?” Or equivalently, “What would make people willing to pay more for the same quantity?”
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normal good
a good for which demand increases when income increases.
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inferior good
a good for which demand decreases when income increases.
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substitute
two goods for which a decrease in the price of one leads to a decrease in demand for the other
- another way to look at it:
- If two goods are substitutes a decrease in the price of one good leads to a decrease in demand for the other good.
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complements
- two goods for which a decrease in the price of one leads to an increase in the demand for the other, e.g. hamburgers and hamburger buns
- ...things that go well together: French fries and ketchup, sugar and tea, DVD movies and DVD players.
- another definition:
- If two goods are complements a decrease in the price of one good leads to an increase in the demand for the other good.
- IMPORTANT TO REMEMBER:
- A decrease in the price of a complement increases the demand for the complementary good. An increase in the price of a complement decreases the demand for the complementary good
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supply curve
a function that shows the quantity supplied at different prices.
- ex:
- a supply curve shows how producers respond to higher prices by producing more and to lower prices by producing less.
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quantity supplied
the quantity that sellers are willing and able to sell at a particular price
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law of supply
The higher the price, the greater the quantity supplied
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producer surplus
the producer’s gain from exchange, or the difference between the market price and the minimum price at which a producer would be willing to sell a particular quantity.
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total producer surplus
measured by the area above the supply curve and below the price.
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shifts in graphs
Once you know that a decrease in costs shifts the supply curve down and to the right and an increase in costs shifts the supply curve up and to the left, then you really know everything there is to know about supply shifts
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supply shifter (things tha shifts the graph)
Technological innovations and changes in the price of inputs
Taxes and subsidies
Expectations Entry or exit of producers
Changes in opportunity costs
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