Chapter 2 - Demand and Supply

How does a change in the number of consumers in the market affect market demand?

An increase in the number of buyers will increase the consumer purchases and shift the market demand curve to the right.

How do sellers respond to an increase in the price of the good?

An increase in the price results in an increase of quantity supplied. It increases expected revenues and profits from its sale.

Does the movement along a supply curve from the point P1 to the point P2 represent an increase in supply or an increase in the quantity supplied?

An increase in the quantity supplied.

What is a market?

Any arrangement that brings together buyers and sellers.

Does a price ceiling result in a shortage or surplus?

shortage

Does a price floor result in a surplus or shortage?

surplus

Producer surplus

the amount received by firms from sales of a product in excess of the minimum amount they would have accepted to make the product available.

law of demand

the quantity of demand of a good/service is inversely related to its price. (pertains to market, not individual)

Law of supply

the quantity supplied of a good/service is directly related to a change in its market price.

What does net social welfare measure?

the sum of consumer surplus and producer surplus Can be used as a measure of market efficiency

Consumer surplus

the value received by consumers from purchases of a product in excess of their expenditures.

Substitution effect

when there is no change in purchasing power, an increase in the price of a good will cause buyers to unambiguously shift their purchases into a relatively less expensive substitutes.

Figure 2.12 S1-S2 shift. How does this change affect the market equilibrium price and quantity?

Decreases equilibrium price and quantity.

Shortage

Exists when prices are below the equilibrium, and demands exceed quantity supplied.

How does the higher level of demand affect the market equilibrium price and quantity?

Higher demand increases equilibrium price and quantity

30. How do taxes and other government regulations affect market supply?

Higher taxes and government regulations increase firm's cost of doing business and lower after-tax profit. Lowering corporate taxes, receiving govt subsidies, and removing costly regulations increase after-tax profits, encourage production, and shift the market supply curve to the right.

Substitute goods

If two goods are substitutes in consumption, an increase in the price of good "y" will cause some consumers to shift their purchases into relatively less expensive good "x".

How did changes in technology affect supply?

Improved production can be produced from given combination of inputs which increases revenue. Unchanged amount of output can be produced using fewer inputs decreases production costs. Both suggest an increase in profits.

In reviewing figure 2.3, how does the price increase from P1 to P2 of good Y affect the demand shift from D1 to D2 for good X?

Increase in price of good y increases the demand for good x which is a substitute.

Is the shift from the combination P1,Q1 to P2,Q2 an increase in demand or an increase in the quantity demanded?

Increase in quantity demanded

In figure 2.12, is the shift from S1 to S2 an increase in supply or an increase in quantity supplied?

Increase in supply

How do prices of related goods affect demand for a good?

Increase in the price of goods decreases quantity demand. Decrease in price demanded increases quantity demanded.

If the demand curve represents the maximum price a consumer is willing to pay for a good, what is the difference between the total price paid by the consumer and the price received by the seller if a sales tax is added?

Increasing per-unit sales tax lowers the P-intercept, but leaves the slope of the demand equation unchanged. There is a parallel left shift.

What are the factors that determine the total supply of the good?

Input prices, production technology, taxes and government regulation, prices of related goods, number of firms in the industry

How does increase in money income affect demand for a good?

It will increase the demand for most goods/services.

How do input prices affect market supply?

Lower prices will reduce production cost and increase expected profit. There will be an increase in output which shifts market supply curve to the right.

Producer Surplus calculation

PS= 1/2(P*-B)Q*

Equation 2.1 what does M represent?

Per capita money income

Equation 2.1 what does PxPx represent

Price

Equation 2.1 what does PyPy mean

Price of related good

How does a change in demand differ from a change in the quantity demanded? Explain conceptually and graphically.

Quantity demanded deals with price, and graphically, the price points will move along the demand curve. Demand deals with all other factors aside from price, and graphically, it shifts to a second demand curve to the right or left depending on whether there is an increase or decrease

What does a non-price rationing mechanism refer to?

Queuing - standing in line for hours on end for rationed gasoline for example

In the example associated with figure 2.11, what causes the increase in demand from D1 to D2?

The change in demand for cheeseburgers due to medical research.

Producer Surplus

The difference between total revenues received from the sale of a good/service and the minimum needed to produce it. It is equal to the firm's operating profit (revenue-expenses)

What does deadweight loss measure?

The lost net social welfare that results from the price ceiling.

Market Equilibrium

The price where quantity demanded equals the quantity supplied.

What do economists mean when they refer to the rationing function of prices?

The process by which changes in market-determined prices eliminate shortages and surpluses.

Graphically how is a shift from point a to point B in figure 2.1 different from a shift to the right of the entire curve from D1 to D2 in figure 2.2?

The shift from A to B in 2.1 shows quantity demanded along the demand curve. The entire shift from D1 to D2 shows demand and how something other than price has affected it.

Consumer Surplus

The value that buyers received from the purchase of a good/service in excess of the amount paid.

In reviewing the solved exercise for this section, how does the change in per capita income affect the market equilibrium price and quantity? Does it affect the market demand or the market supply?

When the per capita increases, the market equilibrium price and quantity go up. This increase in income also increases demand because income is a demand determinant.

Ceteris Paribus

a Latin phrase that means "all other things held constant"

Inferior good

a good that consumers demand less of when their incomes increase

normal good

a good that consumers demand more of when their incomes increase

Income effect

as the price of a good decreases, the consumer's purchasing power increases, and vice versa. This causes a change in quantity demanded for the good

Complements in consumption

goods that are used together

What is a price floor?

lowest legal price that can be paid for a good or service

What is a price ceiling?

maximum legal price that can be charged for a product

Consumer Surplus calculation

CS = 1/2 (A-P*)Q*