Unit 2: Top 10 Utility & Elasticity Concepts to Know (Micro)
Unit 2: Top 10 things you need to know about diminishing marginal utility, consumer behavior, price elasticity of demand, and price elasticity of supply. This is geared toward college-level principles of micro courses and students enrolled in AP Economics. Top 10 Concepts in this video: #1. Total Utility vs. Marginal Utility, #2. Utility-Maximization Formula, #3. Consumer & Producer Surplus, #4. Determinants of Price Elasticity of Demand, #5. Slope vs. Elasticity, #6. Extreme Elasticity, #7. Total Revenue & Elasticity, #8. Income Elasticity of Demand, #9. Cross-Price Elasticity of Demand, and #10. Price Elasticity of Supply.
2.1 Consumer Surplus (Micro)
1. Students will be able to define consumer surplus.
2. Students will be able to identify the area of consumer surplus in a market.
3. Students will be able to calculate the area of consumer surplus in a market.
2.2 Producer Surplus (Micro)
1. Students will be able to define producer surplus.
2. Students will be able to identify the area of producer surplus in a market.
3. Students will be able to calculate the area of producer surplus in a market.
Demand is the relationship between the quantities of a good that consumers are willing and able to purchase and the various prices in a given period of time.
The law of demand states that consumers buy more at lower prices and less at higher prices all other things equal (ceteris parabis).
There is a difference between a change in demand and a change in quantity demanded. A change in quantity demanded can only be caused by a change in the price of a good. It is movement along the demand curve. At a lower price, a greater quantity is demanded.
A change in demand means that more or less is demanded at every price; it is caused by changes in Tastes, Income, Market size, Expectations, and prices of Related goods (TIMER)
The income effect, substitution effect, and the law of diminishing marginal utility can explain why a demand curve is downward sloping.
The law of diminishing marginal utility (DMU) states that as more of a good or service is consumed in a given period of time, the additional benefit or satisfaction declines (Diamond-Water Paradox).
Supply is the relationship between price and the amount that producers are willing and able to sell at various prices in a given period of time. Producers are willing to sell more at higher prices and less at lower prices, all other things equal.
There is a difference between a change in supply and a change in quantity supplied. A change in quantity supplied can only be caused by a change in the price of a good. It is movement along the curve. A change in supply is a shift of the curve where more or less is supplied at every price. Changes in technology, Production costs, Expectations, Subsidies, Taxes, and Technology will cause a shift in supply (PESTT)
In competitive markets, supply and demand constitutes the sum of many individual decisions to sell and buy. The interaction of supply and demand determines the price and quantity that will clear the market. The price where quantity supplied supplied and quantity demanded are equal is called the equilibrium or market-clearing price.
At a price higher than equilibrium, there is a surplus and pressure on sellers to lower their prices. At a price lower than equilibrium, there is a shortage and pressure on buyers to pay higher prices.
An administered maximum price is called a price ceiling. A price ceiling is below the equilibrium price causes shortages. A price ceiling set at or above market equilibrium price has no effect on the market.
An administered minimum price is called a price floor. A price floor above the equilibrium price causes a surplus. A price floor set at or below equilibrium has no effect on the market.
Consumer surplus is the difference between what consumers are willing to pay for a good or service and the price that consumers actually have to pay.
Producer surplus is the difference between the price businesses would be willing to accept for the goods and services and the price they actually receive.
Price elasticity of demand refers to how much the quantity demanded changes in relation to a given change in price. If the percentage change in quantity demanded is greater than the percentage change in price, the demand for the good is considered elastic. If the percentage change in quantity demanded is less than the percentage change in price, the demand for the good is considered inelastic (ex. insulin). If the percentage change in quantity demanded equals the percentage change in price, the demand for the good is considered unit elastic.
Luxuries have a more elastic demand than necessities. High-priced goods have a more elastic demand than low-priced goods. Goods that are habit-forming tend to have an inelastic demand. Demand is more elastic in the long run than in the short run.
Price elasticity of demand can also be determined by using the total revenue method.
Price elasticity of supply, also stated in percentage terms, refers to how much quantity supplied changes in relation to a given change in price. Supply is more elastic in the long run than in the short run.
In a market economy, prices provide information, allocate resources, and act as rationing devices. It is important to know how to illustrate a wide range of situations with supply and demand graphs.
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