Consumers' expenditure is limited and he must distribute it between different commodities.
At equilibrium the budget line is tangent to indifference curve (relative prices are equal to marginal rate of substitution).
If the price of 1 good changes, the budget line pivots. All the new 2 quantities attainable form price consumption line. From this line we can derive the normal demand curve.
People buy more of the good if the price of product falls:
It's cheaper (substitution effect), budget line moves parallel to new budget line in the old indifference curve.
The fall in price leaves them more income to spend (income effect). Move parallel by consumption line to new indifference curve.
various amounts of a good or service that consumers are willing and can by at various prices in a given period of time-
1.income,2.population,3.seasonal factors,4.tastes and fashion,5.change in the price of substitutes,6.change in the price of complements, advertising, price, government influences, distribution of income
>1-elastic,price up revenue down<1-inelastic-price up, revenue up=1-unit el.
1. Avail. of substitutes
2. Proportion of income spent
5. Economic and human constraints
6. Time period
7. number of substitute uses (the more the more elastic)
8. type of product(luxury)
9. How closely defined-oil, Esso
change in Q/change in P
The various amounts of a good or service producers are willing to put on the market at various prices in a given period of time.
1.change in the price of a factor of production 2.change in the state of technology 3.govn intervention 4.new firms entering the industry, price, the price of other commodities, tastes of producers, exogenous factors (weather).
iii. Long run - depends on factors:
2. Factor mobility
3. Natural constraints
4. Risk taking
Creates black market (e.g. in Russia)
1. Wartime controls (coupons)
2. Rent control (abolished in 1988)
3. Interest (low interest rates will create a shortage of supply)
1. Agricultural prices (CAP)
2. Minimum wages (creates unemployment)
3. Exchange rates
Applied to farmers.
1. Producers learn from experience
2. Distributed time lags
3. Unplanned variations of supply will modify further (especially in agriculture)
4. Prices might be inflexible (change too slow to bring about a change)