on 13-Nov-2016 (Sun)

productive arguments use [...] tense, the language of choices and decisions.

The demand function represents buyers' behavior.

Prices influence consumers' purchase decisions. The demand function can be depicted as a negatively sloped demand curve.

• If all other factors are equal, as the price of a good rises, consumer demand falls. This is mainly due to the availability of substitutes, which are goods that perform similar functions.
• As the price of a good falls, consumer demand rises.

Therefore, there is an inverse relationship between the price of a good and the amount that consumers are willing to buy. The demand curve normally slopes downward. It tells the analyst the quantity that consumers are willing to buy for each possible price when all other influences on consumers' planned purchases remain the same.

Example 1

Refer to the graph below. What is the quantity of cassettes demanded when their price is $4.00 per week?

Answer: Two cassettes per week. The demand curve tells how much is demanded at each price. To determine the quantity demanded, find $4.00 on the vertical axis and read across until you meet the demand curve. Then read the quantity from the horizontal axis.

When any factor that influences buying plans, other than the price of the good, changes, there is a change in demand for that good. When the quantity of the good that people plan to buy changes at each and every price, there is a new demand curve. These factors include changes in income, number of consumers in the market, changes in the price of a related good, etc.

Example 2

Assume the graph below reflects demand in the automobile market. Which arrow best captures the impact of increased consumer income on the automobile market?

Answer: D. Income is a shift factor of demand. An increase in income increases the number of automobiles demanded at each price. Therefore demand has shifted to the right.

• When demand increases, the quantity that people plan to buy increases at each and every price, so the demand curve shifts rightward.
• When demand decreases, the quantity that people plan to buy decreases at each and every price, so the demand curve shifts leftward.

The demand curve isolates the impact of price on the amount of a product purchased.

• A change in quantity demanded (caused by price change ONLY) is a movement along a demand curve from one point to another.
• Changes in other factors (anything other than price), such as income, tastes, expectations, and the prices of closely related goods, will shift the entire demand curve inwards or outwards. This is referred to as change in demand.

Example 3

Refer to the graph below. Consumers began purchasing more of a product due to a decrease in price. Which arrow best represents this statement?

Answer: C. A change in price causes a movement along the demand curve. When price falls, the movement is downward and to the right.

The Supply Function and the Supply Curve

Resources and technology determine what it is possible to produce. Supply reflects a decision about which technologically feasible items are best to produce. The supply function represents sellers' behavior.

Prices influence producers' supply decisions. The supply function can be depicted as a positively sloped supply curve.

• If all other factors are equal, a higher price will increase the producer's incentive to supply the good. Higher prices increase the producer's profit, which is the excess of sales revenue over the cost of production.
• As the price of a good falls, its supply falls as well.

Therefore, there is a direct relationship between the price of a good and the amount of that good that will be supplied. The supply curve slopes upward. It tells the analyst the quantity that producers are willing to supply for each price when all other influences on producers' planned sales remain the same.

Example 4

The graph below displays the quantity associated with price in a supply table.

To find the quantity supplied at a price of $1, extend a horizontal line from $1 to the supply curve and drop a vertical line down to the quantity axis. These lines will intersect at 0. This is the quantity that will be associated with a price of $1 on a supply table.

The law of supply results from the general tendency for the marginal cost of producing a good or service to increase as the quantity produced increases.

A supply curve is also a minimum-supply-price curve. The greater the quantity produced, the higher the price a firm must be offered to be willing to produce that quantity.

The quantity supplied of a good or service is the amount that producers plan to sell during a given time period at a particular price.

Price is just one of the factors that affect producers' supply decisions. The supply curve isolates the impact of price on the quantity of a product supplied and assumes that all other factors stay the same.

• A change in quantity supplied is caused by a price change ONLY. It is a movement along the same supply curve.
• When one of the other factors that influence selling plans changes, there is a change in supply and a shift of the supply curve.

Example 6

A tax will shift the supply curve up by the amount of the tax.

At every price level, less is supplied. For example, at price P₀, originally Q₀ is supplied. After the tax, Q₁ is supplied at price P₀.

An aggregate demand curve is simply a schedule that shows amounts of a product that buyers collectively desire to purchase at each possible price level.

An aggregate supply curve is simply a curve showing the amounts of a product that all firms will produce at each price level.

Example 1

Refer to the graph below. What is the market quantity that would be supplied at a price of $2.00?

Market quantity is the sum of individual quantities supplied at each price. At a price of $2.00, Ann supplies 4, Barry supplies 3, and Charlie supplies 0. The market supply is 7.

Market Equilibrium

Equilibrium is a state in which conflicting forces are in balance. In equilibrium, it will be possible for both buyers and sellers to realize their goals simultaneously.

The following graph depicts the market supply and demand for concert tickets at Madison Square Garden in New York City.

Equilibrium price and quantity are where the supply and demand curves intersect. Draw a horizontal line from the intersection to the price axis. This is equilibrium price: $60. Draw a vertical line from the intersection to the quantity axis. This is equilibrium quantity: 300. It is equilibrium because quantity demanded equals quantity supplied at $60 per ticket. At this price, there is neither surplus (excess supply) nor shortage (excess demand), so there is no downward or upward pressure for the price to change.

Surplus will push prices downward towards equilibrium.

• Suppose the price is initially above the equilibrium price (P₂) and sits at P₁.
• Quantity supplied (Q_1s) will exceed quantity demanded (Q_1D), creating a surplus.
• The surplus will put downward pressure on prices since producers will begin to lower their prices to sell the surplus.
• As a result, the price will fall, the quantity supplied will decrease, and the quantity demanded will increase until the equilibrium price (P₂) is restored.
• This process involves movements along supply-and-demand curves since the changes are caused by price fluctuations.

Similarly, shortages push prices upward towards equilibrium.

Because the price rises if it is below equilibrium, falls if it is above equilibrium, and remains constant if it is at equilibrium, the price is pulled toward equilibrium and remains there until some event changes the equilibrium. We refer to such an equilibrium as being stable because whenever price is disturbed away from the equilibrium, it tends to converge back to that equilibrium.

An unstable equilibrium is an equilibrium that is not restored if disrupted by an external force. While most equilibria studied in economics are of the stable variety, a few cases of unstable equilibria do emerge from time to time, in limited circumstances.

Consumer Surplus

Consumer surplus is the area below the demand curve but above the actual price paid. It is the difference between the amount consumers are willing to pay and the amount they have to pay for a good.

Consider the market for a good.

• If the market price is $100, then the 30th unit will not sell because those who demand it are only willing to pay $60 for the good.
• At $100, the 17th unit will sell because those who demand it are willing to pay up to $100 for the good.
• At $100, the 5th unit will sell because those who demand it are willing to pay up to $133 for the good.

• For all those goods under 17 units, people are willing to pay more than $100.
• The area represented by the distance above the actual price paid and below the demand curve is called consumer surplus.
• This area represents the net gains to buyers from market exchange.

Lower market prices increase the amount of consumer surplus in the market.

Es el exedente en precio que unas personas están dispuestas a pagar por sobre el precio de equilibrio.

Producer Surplus

Producer surplus is the difference between the minimum supply price, represented by the supply curve, and the actual sales price.

• It is measured by the area below the price and above the supply curve, up to the quantity sold.
• It accrues to owners of firms and resource suppliers.

Example

The actual selling price of bananas is $9 per kg.

Now imagine that there are only 10,000 kg bananas being supplied at the moment. The marginal cost per kg is only $3 but the selling price is $9. So there is an additional $6 per kg being raised. This is the producer surplus per kg. The total producer surplus when 10,000 kg are produced is thus $60,000.

Due to the surplus, more producers enter the market and another 10,000 kg are produced, so there are now 20,000 kg of bananas on the market. The marginal costs of producing this additional 10,000 kg have risen to $4.

Producer surplus is not the same as profit. Remember that profit is the return that accrues to owners of a firm and is the difference between sales revenue and total (not marginal) costs of production.

Total Surplus

The following figure shows that a competitive market creates an efficient allocation of resources at equilibrium.

• In equilibrium, the quantity demanded equals the quantity supplied.
• At the equilibrium quantity, marginal benefit equals marginal cost, so the quantity is the efficient quantity.
• The sum of consumer and producer surplus is maximized at this efficient level of output. It is here that all potential gains from production and exchange are realized.

The following figure shows that a competitive market creates an efficient allocation of resources at equilibrium.

• In equilibrium, the quantity demanded equals the quantity supplied.
• At the equilibrium quantity, marginal benefit equals marginal cost, so the quantity is the efficient quantity.
• The sum of consumer and producer surplus is maximized at this efficient level of output. It is here that all potential gains from production and exchange are realized.

Cuando un factor, que no sea el precio, influencia los planes de compra, existe un cambio en la demanda de ese bien.

Cuando la cantidad demandada cambia a cada uno de los presios, existe una nueva curva de la demanda.

Los factores que la cambian pueden ser ingresos, número de consumidores, cambio en el precio de productos relacionados, etc.

Example 2

Assume the graph below reflects demand in the automobile market. Which arrow best captures the impact of increased consumer income on the automobile market?

Answer: D. Income is a shift factor of demand. An increase in income increases the number of automobiles demanded at each price. Therefore demand has shifted to the right.

• When demand increases, the quantity that people plan to buy increases at each and every price, so the demand curve shifts rightward.
• When demand decreases, the quantity that people plan to buy decreases at each and every price, so the demand curve shifts leftward.

A price control is a government-mandated price that may either be greater or less than the market equilibrium price.

A Price Ceiling

A price ceiling is a legal restriction that prohibits exchanges at prices greater than a designated price: the ceiling price. Price ceilings are usually imposed when the equilibrium price is considered too high to be fair. A typical price ceiling results in a lower price than market forces would produce. A shortage will result in a situation in which the quantity demanded by consumers exceeds the quantity supplied by producers at the existing price.

A typical example of a price ceiling is a "rent ceiling," implemented by over 200 U.S. cities. If the rent ceiling is set above the equilibrium rent, it has no effect. The market works as if there were no ceiling. But if the rent ceiling is set below the equilibrium rent, it has powerful effects.

If a rent ceiling is set below the equilibrium price P₀, for example, at P₁, there is a reduction in the quantity that producers are willing to supply qs and an increase in the quantity that consumers demand q_d relative to the original equilibrium quantity q.

Because the legal price cannot eliminate the shortage, other mechanisms operate. For example, a black market is an illegal market that operates alongside a legal market in which a price ceiling or other restriction has been imposed. A shortage of housing creates a black market in housing. Illegal arrangements are made between renters and landlords at rents above the rent ceiling - and generally above what the rent would have been in an unregulated market.

A rent ceiling leads to an inefficient use of resources. The quantity of rental housing is less than the efficient quantity and there is a deadweight loss.

A rent ceiling decreases the quantity of rental housing, shrinks the total producer and consumer surplus by using resources such as search activity, and creates a deadweight loss. It also transfers part of the producer surplus from producers to consumers. The consumer surplus becomes the green area + the pink area.

A Price Floor

A price floor is a minimum price that can be legally charged. It usually fixes the price of a good or resource above the market equilibrium level. Price floors are usually imposed when the equilibrium price is considered too low to be fair. Agricultural price supports and minimum wage legislation are examples of price floors.

If a price floor is set above the equilibrium price, p0, for example, at p1, there is a reduction in quantity demanded from q0 to qd, whilst the quantity supplied increases from q0 to qs. The result is a surplus of qs-qd.

Example 1

Refer to the graph below. A price floor set by the government would be binding and cause the greatest distortion in the market if it were established at what price?

Answer: $3.00.

Given the supply and demand curves in the graph, the equilibrium price is $2.25. A price floor will be binding only if it is above the equilibrium price. So a price floor of $1.50 would not distort the market. The higher the floor above equilibrium price, the greater the market distortion (surplus). A price floor at $3.00 would create a larger surplus than a price floor at $2.50.

It creates a deadweight loss.

Note that a surplus does not mean the good is no longer scarce: people just desire less of the good at the current price than sellers desire to bring to the market. A decline in price would eliminate the surplus but not the scarcity of the item.

Taxes

When a tax is imposed, the government can make either the buyer or the seller legally responsible for payment of the tax. However, the person who writes the check to the government is not necessarily the one who bears the tax burden.

Example 2

The following graph illustrates how a $1,000 tax placed on the sale of used cars would affect the market. Assumption: all used cars are identical.

• Before the imposition of the tax, used cars sold for a price of $7,000 (point A).
• The tax has statutorily been placed on the seller, shifting the supply curve upward by exactly the amount of tax ($1,000).
• Now the price will rise to $7,400 (point B). Therefore, despite the tax being statutorily imposed on sellers, the higher price shifts some of the tax burden to buyers.
  • A buyer will now pay $400 more for a used car.
  • A seller now receives $7,400 from the sale of a used car, but after sending the tax of $1,000 to the government, the seller retains only $6,400. This is exactly $600 less than the seller would have received had the tax not been imposed.
  • In this case, each $1,000 of tax revenue transferred to the government imposes a burden of $400 on the buyer and a $600 burden on the seller.

• As the example shows, the imposition of the $1,000 tax on used cars causes the number of units exchanged to fall from 750 to 500. As trade results in mutual gains for both buyers and sellers, the loss of mutual benefits that would have been derived had the tax not eliminated 250 units of exchange also imposes a cost on buyers and sellers. The loss is referred to as the deadweight loss of taxation. In the graph, the triangle ABC measures the size of the deadweight loss. It generates neither revenue for the government nor gains for any other party.

The effects of a tax depend on the responsiveness of buyers and of sellers to a change in price. It tends to fall more heavily on whichever side of the market has the least attractive options elsewhere and thus is less sensitive to price changes. This is because an inelastic curve indicates there are few substitutes available.

• When demand is relatively inelastic and supply elastic, the primary burden of a tax will fall on buyers.
  Initially, gas costs 50 cents per liter and 1,000 liters are sold per day. The demand curve is relatively inelastic, indicating there are few alternatives to gas.
  
  A 20c tax per liter on suppliers shifts the supply curve up by 20c, establishing a new equilibrium price (65c) and quantity (950 liters). Consumers pay 15c more - meaning they have paid 15c of the 20c tax. Suppliers receive 65c from consumers, pay 20c to the government and are left with 45c - 5c less than before. Suppliers have thus paid 5c towards the tax.
  The tax burden is thus:
  • Consumers: 15c
  • Suppliers: 5c
  Consumers pay more because their demand curve was relatively more inelastic than the supply curve.

• When demand is relatively elastic compared to supply, sellers will bear the larger share of the tax burden.
  Consider the diagram below. Here demand is relatively elastic and supply relatively inelastic.
  
  The demand for luxury boats is relatively elastic as rich people have many alternatives as to how to spend their money. A $25,000 tax on the sale of these boats thus causes a large reduction in the quantity demanded (10 thousand to 5 thousand).
  As the selling price only rises from $100,000 to $105,000, buyers have only paid only $5,000 of the tax. Sellers have thus p

...

Elasticity means "responsiveness." The elasticity of demand measures the responsiveness of the quantity demanded of a product to changes in any of the factors that affect demand. Analysts are interested in knowing how much the quantity demanded will rise or fall for a given change in price or income.

Price elasticity of demand is the percentage change in the quantity of a product demanded divided by the percentage change in the price causing the change in quantity. It indicates the degree of consumer response to variation in price. Specifically, it tells the analyst the percentage change in the quantity demanded for a good caused by a 1% increase in the price of that good.

The change in price is expressed as a percentage of the average price - the average of the initial and new price, and the change in the quantity demanded is expressed as a percentage of the average quantity demanded - the average of the initial and new quantity. Using the average price and average quantity, the same elasticity value is obtained regardless of whether the price rises or falls.

The measure is units-free because it is a ratio of two percentage changes and the percentages cancel each other out. Changing the units of measurement of price or quantity leave the elasticity value the same.

Because a change in price causes the quantity demanded to change in the opposite direction, this ratio is always negative, although economists always ignore the sign and simply use the absolute value. It is the magnitude, or absolute value, of the measure that reveals how responsive the quantity change has been to a price change.

Example 1

A Pizza Hut store can sell 50 pizzas per day at $7 each or 70 pizzas per day at $6 each. The price elasticity is: [(50 - 70)/60] / [(7 - 6) / 6.5] = -2.17.

Own-Price Elasticity of Demand

Demand can be inelastic, unit elastic, or elastic, and can range from zero to infinity. (Note: the negative sign is ignored.)

• If the elasticity coefficient is greater than 1, demand is elastic. A small price change leads to a large change in the quantity demanded. The more elastic the demand, the flatter the demand curve over any specific range. Demands for goods with many substitutes (e.g., juice) are relatively elastic. If the demand curve of a good is completely horizontal, the demand is perfectly elastic. Consumers will buy all of that good at the market price.
• When the elasticity coefficient is less than 1, demand is inelastic. The more inelastic the demand, the steeper the demand curve. Demands for goods with few substitutes (e.g., cigarettes) are relatively inelastic.
• When the elasticity coefficient is equal to 1, demand is said to be unitary elastic.

Because elasticity is a relative concept, the elasticity of a straight-line demand curve will differ at each point along the demand curve. Specifically, a straight-line demand curve is more elastic when price is high. Note that the elasticity is not the slope of the demand curve. Elasticity is used since it is independent of the units of measure.

Example 2

Refer to the graph below. Which of the following is true?

A. Areas C and E are smaller than area A, so demand must be elastic between $10 and $30.
B. Areas C and E are smaller than area A, so demand must be inelastic between $10 and $30.
C. Area F is smaller than areas B and C, so demand must be inelastic between $10 and $30.

Answer: C. Since at $30 the demand is unit elastic, at prices below $30 demand is inelastic. This is because when price rises from $10 to $30, the revenue gained is greater than the revenue lost.

The elasticity of demand among products varies substantially. The determinants of price and income elasticity of demand are:

• The closeness of substitutes. The most important determinant is the availability of substitutes. The closer the substitutes for a good or service, the more elastic the demand for it.
  • Necessities, such as food or housing, generally have inelastic demand.
  • Luxuries, such as exotic vacations, generally have elastic demand.
  When good substitutes for a product are available, a price rise induces many consumers to switch to other products. For example, when the price of apples rises, many consumers simply switch to oranges or other fruits. However, when the price of gasoline rises, most consumers can only slightly cut back their consumption of gasoline, since there is no good substitute for gasoline.

• The proportion of income spent on the good. If expenditures on a product are quite small relative to a consumer's budget, the income effect will be small even if there is a substantial increase in the price of the product. This will make the demand less elastic. For example, if the price of matches triples, consumers would not bother to find substitutes, since they only spend a few bucks on matches each year.

• The time elapsed since a price change. The more time consumers have to adjust to a price change, or the longer a good can be stored without losing its value, the more elastic the demand for that good. In general, when the price of a product increases, consumers will reduce their consumption by a larger amount in the long run than in the short-run. Therefore, the demand for most products will be more elastic in the long run than in the short run.

The price elasticity of demand tends to increase in the long run.

As changing market conditions raise or lower the price of a product, both consumers and producers will respond. However, their response will not be instantaneous, and it is likely to become larger over time. In general, when the price of a product increases, consumers will reduce their consumption by a larger amount in the long run than in the short run. Thus, the demand for most products will be more elastic in the long run than in the short run. This relationship between the elasticity coefficient and the length of the adjustment period is referred to as the second law of demand.

Impact on Total Expenditure

Consumers' total expenditure is the same as total revenues from the suppliers' point of view. One of the most important applications of price elasticity is determining how total consumer expenditure on a product changes when the price changes.

Total Revenues = Total Expenditures = Price x Quantity

According to the law of demand, price and quantity move in opposite directions. When the price changes, total revenue also changes. But a rise in price doesn't always increase total revenue. The change in total expenditures depends on whether the effect of the changes in price or the effect of the changes in quantity is greater.

• When demand is inelastic, a change in price will cause total expenditures to change in the same direction.
• When demand is elastic, a change in price will cause total expenditures to move in the opposite direction.
• When demand elasticity is unitary, total expenditures will remain unchanged as price changes.

Because of the relationship between price and quantity sold, a firm's total revenue can rise, fall or stay the same in response to a change in price. The outcome is determined by the price elasticity of demand. This conclusion is similar to that of total expenditures.

Note that firms attempt to maximize profit (total revenue minus total cost), not revenue.

V₂ receptor (V₂R) differs from V₁R primarily in the number of sites susceptible to N-linked glycosylation; the V₁R has sites at both the amino-terminus and at the extracellular loop, whereas the V₂R has a single site at the extracellular amino-terminus.^[1]

The well known antidiuretic effect of vasopressin occurs via activation of V₂R.^[1] Vasopressin regulates water excretion from the kidney by increasing the osmotic water permeability of the renal collecting duct – an effect that is explained by coupling of the V₂R with the G_s signaling pathway, which activates cAMP. Interestingly, the V₂R continues to activate G_s after being internalized by β-arrestin rather than being desensitized. This internalized G_s signaling by V₂R is explained by the receptors ability to form "mega-complexes" consisting of a single V₂R, β-arrestin, and heterotrimeric G_s.^[3] The increased intracellular cAMP in the kidney in turn triggers fusion of aquaporin-2-bearing vesicles with the apical plasma membrane of the collecting duct principal cells, increasing water reabsorption.^[1]

V₁ receptors (V₁Rs) are found in high density on vascular smooth muscle and cause vasoconstriction by an increase in intracellular calcium via the phosphatidyl–inositol-bisphosphonate cascade.^[1] Cardiac myocytes also possess V₁R. Additionally V₁R are located in brain, testis, superior cervical ganglion, liver, blood vessels, and renal medulla.^[1]

V₁R is present on platelets, which upon stimulation induces an increase in intracellular calcium, facilitating thrombosis. Studies have indicated that due to polymorphism of platelet V₁R there is significant heterogeneity in the aggregation response of normal human platelets to vasopressin.^[1]

V₁Rs are found in kidney, where they occur in high density on medullary interstitial cells, vasa recta, and epithelial cells of the collecting duct.^[1] Vasopressin acts on medullary vasculature through V₁R to reduce blood flow to inner medulla without affecting blood flow to outer medulla. V₁Rs on the luminal membrane of the collecting duct limit the antidiuretic action of vasopressin. Additionally, vasopressin selectively contracts efferent arterioles probably through the V₁R, but not the afferent arteriole.^[1]

Income Elasticity of Demand: Normal and Inferior Goods

Definition: The percentage change in the quantity of a product demanded divided by the percentage change in consumer income causing the change in quantity demanded.

Since increases in consumer income will increase the demand for most goods, income elasticity measures the responsiveness of a demand for a good to a change in income. Specifically, it tells the analyst the percentage change in the quantity demanded for a good caused by a 1% increase in consumer income.

Calculation:

The type of product is the primary determinant of income elasticity of demand.

• Most products have positive income elasticity; normal goods have positive income elasticity.
  • Necessities have low income elasticities (between 0 and 1); when income rises by 1%, the quantity demanded for necessities will increase by less than 1%.
  • Luxuries have high income elasticities (greater than 1).

• A few commodities (inferior goods) have negative income elasticity; as income expands, the demand for them will decline. Examples of inferior goods are margarine, junk food, etc.

Cross-Price Elasticity of Demand: Substitutes and Complements

The cross elasticity of demand is a measure of the responsiveness of demand for a good to a change in the price of a substitute or a complement, other factors remaining the same. The formula for calculating the cross elasticity is:

• The cross elasticity of demand for a substitute is positive.
• The cross elasticity of demand for a complement is negative.

The following figure shows the increase in the quantity of pizza demanded when the price of a burger (a substitute for pizza) rises. The figure also shows the decrease in the quantity of pizza demanded when the price of a soft drink (a complement of pizza) rises.