Applying graphs to economics

Direct relationship a positive association between two variables. When one variable increases, the other variable increases, and when one variable decreases, the other variable decreases. In short, both variables change in the same direction. Inverse relationship a negative association between two variables. When one variable increases, the other decreases, and when one variable decreases, the other variable increases. Simply, the variables move in opposite directions.
Independent relationship a zero association between two variables. When one variable changes, the other variable remains unchanged.

Slope the ratio of the change in the variable on the vertical axis (the rise or fall) to the change in the variable on the horizontal axis (the run) Positive slope upward sloping Negative slope downward sloping

3 variable relationship depicted by a graph showing a a shift in a curve when the ceteris paribus assumption is relaxed and a third variable such as annual income not on either axis of the graph is allowed to change.

Demand refers to the number or amount of goods and services desired by the consumers Demand schedule the relationship between the quantity of a good demanded and the price of that good.
Price 1 2 3 4 5
Qty.Dmd

1000 800 600 400 200

Demand curve - is formed by the line connecting the possible price and quantity purchased responses of an individual consumer. It allows you to find the quantity demanded by a buyer at any possible selling price by moving along the curve; shows graphically the relationship between the quantity of a good demanded and its corresponding price, with other variables held constant.

The demand curve is typically downward sloping. It describes the negative/inverse relation between the price of a good and the quantity that consumers want to buy at a given price. This property of the demand curve was given a name,

THE LAW OF DOWNWARD SLOPING DEMAND.

Thus, greater quantity will be demanded when the price is lower, and when the price of goods increases, buyers then to buy less of it.

Usually in economics, price is on the vertical axis y-axis

and the quantity demanded on the horizontal axis. X-axis

Market demand sum or total of individual demand curve or schedule. Quantity demanded the amount of goods and services consumers are willing and able to buy and purchase at a given price, place and at a given period of time.

Change in quantity demanded results solely from a change in the price - is a movement between points along a stationary demand curve.

If ceteris paribus no longer applies and if one of the non price determinants changes, the location of the demand curve shifts.

Change in demand is an increase (rightward shift) or a decrease (leftward shift) in the quantity demanded at each possible price; this is brought by the changes in all determinants of demand except price.

Determinants of Demand
1.
2. 3. 4. 5. 6. 7.

Price of the product Consumers income Wealth or net worth Prices of other goods and services Tastes and preferences Expectations of future prices population

Income the sum of all a households wages, salaries, profits, interest payments, rents and other forms of earnings in a given period of time. - it is a flow measure

Type of goods 1. Normal goods refer to a good for which quantity demanded at every price increases when income rises; any good for which there is a direct relationship between changes in income and its demand curve.
2.

Inferior goods refers to a good for which quantity demand falls when income rises; any good for which there is an inverse relationship between changes in income and its demand curve.

Wealth if a given period you spend less than your income, you save. The amount you save is added to your wealth. When you spend more than your income, you dissave you reduce your wealth.

Kinds of related goods:

1. Substitutes goods that can serve as replacements for one another; when a price of one increases, demand for the other goes up; a good that competes with another good for consumer purchases as a result there is a direct relationship between the price change for one good and the demand for its competitor good.
2. Complements, complementary goods goods that go together; a decrease in the price of one results in an increase in demand for the other and vice versa; a good that is jointly consumed with another good, as a result there is an inverse relationship between a price change for one good and the demand for its go together good.

Law of Demand
As the price increases, quantity demanded decreases, and as price decreases, quantity demanded increases.
(the word law in this case does not refer to a bill that has been passed by the House of Congress, but to an observed regularity in all markets.)

Validity of Demand The Law of Demand is only true if the assumption of ceteris paribus is applied or other determinants remain constant.

Income effect : when the price of goods decreases, the consumer can afford to buy more of it or vice-versa Substitution effect it is expected that consumers tend to buy goods with a lower price, hence, in case that the price of good that the consumer buy increases, they look for substitutes with a lower price.

Ceteris paribus
All else equal
A device used to analyze the relationship between two variables while the values of other are held unchanged. A Latin phrase that means while certain variables change, all other things remain unchanged

SUPPLY
Supply maximum units quantity of goods and services can offer; refers to specific quantity; a curve or schedule showing the various quantities of a product sellers are willing to produce and offer for sale at possible prices during a specified period of time Supply schedule is the relationship between the quantity of a good supplied and its price.

Price
1

Qty. supplied

200

2
3

400
600

4
5

800
1000

Supply curve shows graphically the quantity of a good supplied at each price; is represented by a simple graph with a positive slope. This tell us that as the price goes up, producers are willing to produce more goods.

Quantity supplied refers to the amount or quantity of goods and services producers are willing and able to supply at a given price at a given period of time; Change in quantity supplied is a movement between points along a stationary supply curve; this is due to a change in the price of goods and services.

Change in supply is an increase (rightward shift) or a decrease (leftward shift) in the quantity supplied at each possible price.; brought about by changes in nonprice determinants; this is brought about by a change in all determinants.

Law of Supply
As price increases, quantity supplied also increases; and as price decreases, quantity supplied also decreases. Validity of Law of Supply Just like the Law of Demand, the law of supply is only correct if the assumption of ceteris paribus is applied. This means that there is no change in the non-price determinants of supply.

Determinants of Supply
1.
2. 3. 4. 5. 6. 7.

Change in technology Cost of inputs used Expectation of future price Change in the price of related goods Government regulation and taxes Government subsidies Number of firms in the market

Market - any arrangement in which buyers and sellers interact to determine the price and quantity of goods and services exchanged. Surplus a market condition existing at any price where the quantity supplied is greater than the quantity demanded; excess supply Shortage a market condition existing at any price where the quantity supplied is less than the quantity demanded; excess demand Equilibrium a market condition that occurs at any price and quantity where the quantity demanded and quantity supplied are equal. Market equilibrium price-quantity point graphically it is the intersection of the supply curve and the demand curve

points A B C

price 1 2 3

QD 1000 800 600

QS 200 400 600

State of market -800 shortage -400 shortage 0

equilibrium

400

800

400 surplus

Equilibrium

Price System
Price System a mechanism that uses the forces of supply and demand to create an equilibrium through rising and falling prices.
2 functions: 1.Price rationing the process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied 2. Price system ultimately determines both the allocation of resources among producers and final mix of outputs.

If price system is not allowed to function, some devices were tried (non price rationing mechanism) 1.Queuing waiting in line as a means of distributing goods and services 2.Favored customers those who receive special treatment from dealers during situations of excess demand 3.Ration coupons tickets or coupons that entitle individuals to purchase a certain amount of given product per month.
Black market a market in which illegal trading takes place at market-determined prices.

Price ceiling and price floors are the maximum and minimum prices enacted by law, rather than allowing the forces of supply and demand to determine prices. Price ceiling the maximum price that sellers may charge for a good, usually set by the government. Price floor or support price for agricultural products, is a minimum legal price.

Elasticity
Elasticity measures the responsiveness of one variable to a certain change of another variable 2 significant words: measure reported as numbers or coefficients responsiveness meaning reaction to change (or sensitivity)

Basic formula for Elasticity

Elasticity = percentage change in variable x percentage change in variable y Where: Greek letter epsilon : symbol for elasticity Greek letter which means change % - percentage
Mathematically, = % x % y

Types of elasticity
1.
2. 3. 4. 5.

Elastic Inelastic Unitary elastic Perfectly elastic Perfectly inelastic

>1 <1 =1 = =0

Price Elasticity
Measures the percentage change in quantity with respect to percentage change in price Categories: 1.Price elasticity of demand 2.Price elasticity of supply

Price Elasticity of Demand

Measures the responsiveness of the quantity demanded with respect to its price
Formula
PD = Percentage change in quantity demanded percentage change in price

Price Elasticity of Supply

Measures the responsiveness of the quantity supplied with respect to its price
Formula
PS = Percentage change in quantity supplied percentage change in price

Income Elasticity of Demand

The ratio of percentage change in quantity demanded of a good or service to a given percentage change in income

EI = percentage change in quantity demanded percentage change in income

>0 <0 normal good inferior good

Cross Elasticity of Demand

Responsiveness of the quantity demanded to changes in price of some other good. The ratio of the percentage change in the quantity demanded of a good or service to a given percentage change in the price of another good.
Formula: c = percentage change in quantity demanded of one good percentage change in price of another good Positive Cross Elasticity = goods are substitutes Negative Cross Elasticity = goods are complements