AP经济学复习整理（2）

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　　Chapter 4 Demand and Supply: the Basics

　　●Competitive Markets

　　With a competitive market, the sellers or firms are price-takers. There are too many sellers for any effective price conspiracy to take place.

　　Functions of prices: disciplinarians, signals and rationers.

　　●Market Equilibrium

　　·Trial and Error

　　The establishment of prices in competitive settings comes by trial and error

　　Characteristics of equilibrium:

　　1. no tendency for change;

　　2. the amounts demanded equal the amounts supplied;

　　3. no shortage or surplus.

　　·Disequilibrium

　　If surplus happens, the market will reduce the price to equilibrium.

　　If shortage happens, the consumers will bid the price to equilibrium.

　　·Ceteris Paribus Conditions

　　Demand Factors involved：

　　1. the number of consumers; Positive

　　2. tastes and preferences of consumers; Positive

　　3. prices of substitutes; Positive

　　4. prices of complements; Inverse

　　5. consumers’ income; Positive

　　6. price expectations Positive

　　Supply Factors involved:

　　1. the number of sellers; Positive

　　2. cost of resources or production; Inverse

　　3. price of substitutes (goods could be produced with similar resources); Inverse

　　4. price expectations; Inverse

　　5. technology; Positive

　　6. taxes; Inverse

　　7. subsidies; Positive

　　●Government-induced Changes – Price Ceilings and Price Floors (for the suppliers)

　　A government can establish a price ceiling to prohibits prices to rise above a certain level as well as establish a price floor to ensure the basic cost of a certain good, e.g., to ensure the lowest wage.

　　Price ceiling is established under the equilibrium price when the equilibrium price is too high. (mortgage fund)

　　Price floor is established above the equilibrium price when the equilibrium price is too low. (agricultural products)

　　●Giffen Goods and Inferior Goods

　　Giffen good for which there is an upward-sloping demand curve.

　　Interior good is good whose consumption decreases as income increases.

　　Chapter 5 Applications of Demand and Supply – Elasticity

　　●Definition of Elasticity

　　The problem of elasticity is based on the personal dilemma – real life conditions.

　　Elasticity relates to the responsiveness to price changes – the sensitiveness of the consumers to the price changes.

　　●P(Price)*Q(Quantity)=TR(Total Revenue)

　　If the change in price results in:

　　1. the same change in quantity, this is called a unit elastic or proportional change;

　　2. a more change in quantity, this is called elastic;

　　3. a less change in quantity, this is called inelastic.

　　●Price Elasticity = (%△Quantity Demanded)/(% △Price)

　　If the result is:

　　1. 1, it means it’s a unit of elasticity;

　　2.<1, it means it’s inelastic;

　　3. >1, it means it’s elastic.

　　●Two Formulas

　　E(Demand)= △Q/(Q1+Q2)

　　E(Supply)=

　　●Limits and Degrees of Elasticity

　　Perfectly elastic, coefficient of elasticity is infinity, which means that the buyer is so sensitive to price changes. (Perfectly Competitive) The graph is a horizontal line. The line can move up or down (the price may change.)

　　Factors:

　　1. Price elasticity can vary along a demand curve. Price high, elastic; price low, inelastic.

　　2. In the short run, inelastic (scarcity of products and resources). Over the long run, elastic (more choices).

　　3. The competitiveness can also affect the elasticity. Positive.

　　4. The nature of the product determines the elasticity(e.g. luxury or necessity).

　　●Cross-elasticity of Demand

　　Based on the question: what effect on quantities demanded of one product will a price change in another product have?

　　CPED(Cross Price Elasticity of Demand) = (%△Quantity Demanded of Product Y )/(%△Price of Product X)

　　If quantities demanded of A increase as the price of B increases, then they are substitute.

　　If quantities demanded of A decrease as the price of B increases, then they are complement.

　　●Determinants of Price Elasticity of Demand

　　1. The period of adjustment; Positive

　　2. The ratio of the cost of a particular product to the total budget of the consumer; Inverse

　　3. Competitive structure of the market and consumer choices. Positive.

　　●Income Elasticity of Demand

　　Definition: (%△Consumption of a Good)/(%△Consumer Income)

　　The rate of normal good is positive. >1 makes more elastic while<1 inelastic.

　　●Price Elasticity of Supply – Similar rule of that of demand

　　●Incident of Tax on Suppliers and Consumers

　　If government imposes a tax on a supplier, part of the burden can be in the form of an increase in the produce or the supplier who produce less.

　　For inelastic goods, supplier is willing to put the burden on the price.

　　For elastic goods, supplier prefers to reduce its production to reduce cost.

　　Chapter 6 Theory of Consumer Choice or Behavior

　　●Basic Tenets of the Theory of Consumer Choice

　　1. The consumer is rational.

　　2. The consumer can rank goods.

　　3. The consumer understands the law of diminishing marginal utility: satisfaction derived form a continuing consumption is going to increase at a decreasing rate. The marginal utility is decreasing while the total satisfaction increases until too much consumption brings unsatisfaction.

　　4. The consumer faces constraints of prices and incomes.

　　5. The consumer understands the utility-maximizing rule. The consumer wants to obtain as much extra satisfaction for one good per its price as will be obtained from other goods. Therefore, the MU(Marginal Utility) over its Price of all products are all the same( the only combination).

　　●Consumer Surplus

　　Even with diminishing marginal utility, the consumer may enjoy the situation in which the marginal utility is greater than the price charged for the good. In the perfectly competitive market, the seller set the price according to the market and higher than the price expected by the consumer. The consumer surplus is the area encompassed by Price-axis, demand curve and the price paid by the consumer (a triangle area).

　　The market favors consumers who place a higher value than is charged by the market.

　　●Income and Substitution Effect

　　Income effect: as the price of a certain good decrease, a consumer can afford more of it and other goods.

　　Substitution effect: as the price of a certain good decrease, a consumer may buy more of this good relative to the price of a substitute good.