Chapter 3: Demand, Supply and Price Determination

decreases in supply

-a change in a nonprice influence on supply causes less of a product to be supplied at each price; the price curve moves to the left -selllers are willing to offer less of a product at each price because one or more nonprice factors have changed -sellers could have decreased the supply because of increased wage, equipment, or liability insurance costs, or could have switched to the production of another item that is ore profitable. -in summary, means that a smaller quantity is made available for sale at each price, causing the curve to shift to the left.

increases in supply

-a change in a nonprice influence on supply causes more of a product to be supplied at each price; the price curve moves to the right -sellers want to offer more of a g/s for sale at each price and that supply curve for the good or service moves to the right - the increase in supply could have come from lower production costs, new production technology, or sellers trying to increase sales now for fear of a future weakening economy. -in summary, means that a large quantity of a product is available for sale at each price, causing the supply curve to move to the right.

examples of nonprice factors that influence supply

-cost of producing an item; increases of production costs cause less to be made available, decreases in production costs cause more to be made avalaible (technology has made it cheaper to produce many electronics on the market today) -expectations about future market conditions - (grocery mangers anticipate consumer income will fall so they wil change their inventory from cheese and berries to mac and cheese and tuna) -other items the sell does, or could, supply - if a seller finds a more profitable alternative item to sell for sale, it could affect the supply of other items -number of sellers in the market - as competition increases and more sellers enter a market, the supply increases. When sellers leave a market, supply decreases (in towns where more coffee shops keep opening, increasing the supply of places where people can drink coffee)

factors affecting the price elasticity of demand

-necessities verus luxary goods: people respond more to a change in price of a luxary good than necessity -subsitutes: if buyers can switch to similar or alternative products when prices rise, they will respond more elastically to a price change -proportion of income: respond weakly to change of price in birthday cake but respond strongly to change of price of college tuition

factors affecting price elasticity of supply

-price elasticity of supply is primary effected by time -the more time sellers have to react to a price change, the greater the ability to change the quanity supplied and the more elastic is the response

decreases in demand

a change in a nonprice influence on demand causes less of a prodcut to be demanded at each price; the demand curve shifts to the left *an increase in demand means that more of a product is demanded at each price and the demand curve shifts to the right *a decrease in demand means that less is demanded at each price and the demand curve shifts to the left

increases in demand

a change in a nonprice influence on demand causes more of a product to be demanded at each price the demand curve shifts to the right

change in quanity demanded and quanity supplied

a change in the amount of a product demadned or supplied that is caused by a change in price; represented by a movement along a demand or supply curve rom one price-quanity point to another

change in demand

a change in the demand schedule and curve for a product caused by a change in a nonprice factor influencing the product's demand; the demand curve shifts to the right or left -changes in non-price factors cause demand schedules and curves to change as buyers develop new sets of plans

change in supply

a change in the supply schedule and curve for a product caused by a change in a nonprice factor influencing the product's supply; the supply curve shift to the right or to the left

effect of decrease in demand in equilbrium price and equilbrium quantity

a decrease in the demadn for a product causes both its equilbrium price and equilbrium quanity to decrease

price ceilings (upper price limit)

a government set maximum price that can be charged for a good or service; if the equilibrium price is above the price ceiling, a shortage will develop -when they take effect, keep prices lower than they would be otherwise be and result in shortages -example: rent control

price floor

a governmnet-set minimum price that can be charged for a good or service; if the equilibrium price is below the price floor, a surplus will develop -example of minimum wage law -when free-market equilibrium price is below the government-imposed floor, a surplus develops -when they take effect, keep prices higher than they would be otherwise be and result in surpluses

demand curves

a line on a graph that illustrates a demand schedule; it slopes downward because of the inverse relationship between the price and quanity demanded -consumers normally demand more at a lower prices and less at higher prices

supply curve

a line on a graph that illustrates a supply schedule; it slopes upward becasue of the direct relationship between price and quanity supplied

demand schedule

a list of amounts of a product that a buyer would purchase at different prices in a defined period of time period when all nonporous factors are held constant -illustrates the relationship between the amount of a product that a consumer would buy and the product's price -the quanity demanded falls as the price rises, and the quanity demanded rises as the price falls

supply schedule

a list of the amounts of a product that a seller would offere for sale at different prices in a defined time period when all non-price factors are held constant -the quanity supplied would increase as the price increased, adn the quanity supply would decrease as the price decreased

price elasticity

a measure of the strength of buyer's or seller's responses to a price change -if buyers or sellers respond strongly to a price change, we say that the demand or supply is price elastic

markets

a place or situatin in which the buyers and sellers of a product interact for the purpose of exchange

price elastic

a strong repsonse to a price change; occurs when the percentage in the quanity demanded or supplied is greater than the percentage change in price

price inelastic

a weak response to a price change; occurs when the percentage change in the quanity demanded or supplied is less than the precentage change in price

effect of increase in demand in equilbrium price and equilbrium quantity

an increase in the demand for a product causes both its equilbrium price and equilbrium quanity to increase

market clearing price

equilibrium price; price at which the quanity demanded equals the quanity supplied

normal good (or service)

income changes relate directly to the demand for the good or service

inferior good (or service)

income changes relate inversely to the demand for the good or service

usury laws

laws setting maximum intererst rates that can be changed for certain types of loans

nonprice factors influencing demand

nonprice factors, such as income, taste, and expectations that help to determine the demand for a price -taste, fashion and popularity -buyer's income -buyer's expectations cocerning future income, prices, or avalabilities -price of goods related as subsitutes and complements -increase of buyers in the market

nonprice factors that influnce supply

nonprice factors, such as the cost of production and the number of sellers in the market, that help to determine the supply of a product

shortage

occurs in a market when the quanity demanded is greater than the quanity supplied, or when the product's price is below the equilibrium price

surplus

occurs in a market when the quanity supplied exceeds the quanity demadned or when the product's price is above equilibrium

market demand and market supply

the demand of all buyers and supply of all sellers in a market for a good or service; found by adding together all individual demand or supply schedules -markets preform the critical function of price setting as buyers and sellers interact and make economic choices

demand

the different amounts of a product that a buyer would purchase at different prices in a defined time period when all nonprice factors are held constant -refers to buyer's plans concerning the purchase of a good or service -only the product's price is allowed to change, everything else is held constant in order to highlight the relationship between the product's price and the amount of the product a person would be willing and able to buy

supply

the different amounts of a product that a seller would offer for sale at different prices in a defined time period when all nonprice factors are held constant

equilibrium price and equilibrium quanity

the price and quanity where demand equals supply; price and quanity toward which a free market automatically moves

law of supply

there is a direct relationship between the price of a product and the quanity supplied

Law of Demand

there is an inverse relationship between the price of a product and the quanity demanded - holding all nonprice factors constant -consumers purchasing goods and services face a scarcity problem: their incomes are always limited and can only afford so much so as the price goes up, buyers may not be able to afford as much of it as they could at a lower price -when the price of a good or service falls, consumers will likely increase their purchases of the item because they can satisfy more wants and needs with their limited incomes

elastic price change and total revenue

total revenue moves in the opposite direction of a price change when consumers react strongly or elastically

inelastic price changes and total revenue

total revenue moves in the same direction of a price change when consumers react weakly or inelastically

effect of decrease in supply in equilbrium price and equilbrium quantity

with a decrease of supply, the equlibrium price increases and the equilibrium quanity decreases

effect of increase in supply in equilbrium price and equilbrium quantity

with an increase of supply, the equilibrium price falls and the equilibrium quanity increases