Chapter 4: The Market Forces of Supply & Demand

Shortage(a.k.a. excess demand):

when quantity demanded is greater than quantity supplied. - Reduces shortage: sellers raise the price, cause Qd to fall and Qs to rise. Prices continue to rise until market reaches equilibrium.

Determinants of Supply and how a change in them will shift the supply curve?

- # of sellers: an increase in the number of sellers increases the quantity supplied at each price, shifts curve to the right (Vice Versa). - Expectations(Only one that applies to both demand and supply): sellers may adjust supply when their expectations of future price change. - Technology: determines how much inputs are required to produce a unit of output. Increase in production ALWAYS shifts to the right(Vice Versa). - Input Prices: example- wages, prices of raw materials; A fall in input makes production more profitable at each output price, so firms supply a larger quantity at each price, and the S curve shifts to the right(Vice Versa).

Shifts in the Supply Curve:

- Any change that raises quantity supplied at ever price, shifts the supply curve to the right and is called an increase in supply. - Any change that reduces the quantity supplied at every price shifts the supply curve to the left and is called a decrease in supply.

What causes a shift of the supply curve?

- Determinants(input prices, technology, # of sellers, expectations); - if the supply curve shifts to the rights, that is an increase in supply. If the supply curve shifts to the left that is a decrease in supply.

How do you determine equilibrium price and quantity?

- Equilibrium price: the price that equates quantity supplied with quantity demanded. Where Qd and Qs are the same mathematically; where they intersect on the graph. - Equilibrium quantity: the quantity supplied and quantity demanded at the equilibrium price.

Normal vs. Inferior Good

- Normal: a good for which, other things being equal an increase in income leads to an increase in demand(Vice Versa). - Inferior: a good for which, other things being equal, an increase in income leads to a decrease in demand.

Difference between Supply and Quantity Supplied (QS) and how they appear on a graph:

- Quantity Supplied of any good is the amount that sellers are willing and able to sell at a specific price. QS is a point on the supply curve. - Supply curve: set of various quantities supplied(QS) at corresponding prices.

Shifts in the Demand Curve

Any change that increases the demand shifts the demand curve to the right and is called an increase in demand. Any change that reduces the quantity demanded at every price shifts the demand curve to the left and is called a decrease in demand.

Supply and Demand Together:

Creates an equilibrium. At the equilibrium price, the quantity of the good that buyers are willing and able to buy exactly balances the quantity that sellers are willing and able to sell.

What is an equilibrium?

P has reached the level where quantity supplied equals quantity demanded.

How do you create a market supply curve?

Plot the sum of the quantities supplied by all sellers at each price; - shows how the total quantity supplied varies as the price of the good varies, holding constant all the other factors beyond price that influence producers' decisions about how much to sell.

Law of Supply:

the quantity supplied of a good rises when the price of the good rises. When the price falls, the quantity supplied falls as well. Direct relationship between price and quantity.

Surplus (a.k.a. excess supply):

when quantity supplied is greater than quantity demanded. - Reduce surplus: sellers try to increase sales by cutting price. Cause Qd to rise and Qs to fall. Prices continue to fall until market reaches equilibrium.

Shifts in the demand curve:

If the demand curve shifts to the right, that is an increase in demand. If the demand curve shifts to the left, that is a decrease in demand.

Demand Curve Shifters:

- # of buyers: increases QD at each price, shifts D curve to the right. (Vice Versa). - Income: demand for a normal good is positively related to income. Increase in income causes increase in QD at each P, shifts D curve to the right. Demand for an inferior good is negatively related to income. An increase in income shifts D curves for inferior goods to the left. - Prices of Related Goods: substitutes- an increase in the price of once causes an increase in demand for the other. Vice versa; complements- an increase in the price of once causes a fall in demand for the other. - Tastes: anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the right (Vice Versa). - Expectations: if people expect their incomes to rise, their demand for meals at expensive restaurants may increase now (Vice Versa).

Create a market demand curve?

A graph of the relationship between the price of a good and the quantity demanded. A set of various quantities demanded at corresponding prices. **Slopes downward because a lower price means a greater quantity demanded.

Supply Curve:

A graph of the relationship between the price of a good and the quantity supplied; Slopes upward because a higher price means a greater quantity supplied.

Law of Demand

Claim that the quantity demanded of a good falls when the price of the good rises, other things equal; VICE VERSA.

Law of Supply and Demand

The price of any good adjusts to bring the quantity supplied and quantity demand for that good into balance.

Difference between moving along a demand curve and shifting a demand curve:

- A change in the price of the good changes QD and results in a movement along the D curve. - A change in the variables shifts the demand curve.

Shift vs. Movement Along Curve: Demand

- Demand: a shift in the D curve occurs when a non-price determinant of demand changes (like income or # of buyers) - Quantity Demanded: a movement along a fixed D curve occurs when P changes.

What happens to the eq'm price and quantity if both supply and demand shift?

1. Both curves shift. 2. Both curves move same direction. 3. Q either rises or falls, but effect on P is ambiguous or uncertain.

What happens to the eq'm price and quantity if the demand curve shifts?

1. D curve shifts. 2. Either left or right. 3. Shift causes an increase in price and quantity (right); vice versa for left.

3 steps to analyzing changes in eq'm:

1. Decide whether event shifts S curve, D curve, or both. 2. Decide in which direction curve shifts. 3. Use supply-demand diagram to see how the shift changes eq'm P and Q.

What happens to the eq'm price and quantity if the supply curve shifts?

1. S curve shifts. 2. Either left or right. 3. The shift can cause price to fall and quantity to rise. (Vice Versa if left).

Variables (Determinants) that shift the demand curve:

Income, Prices of Related Goods, Tastes, Expectations, # of buyers.

What causes a movement along the supply curve?

Price; if you move upward along a supply curve, that is an increase in the quantity supplied. If you move downward along a supply curve, that is a decrease in quantity supplied.

What causes a movement ALONG the demand curve?

Prices; If you move upward along a demand curve, that is a decrease in quantity demanded. If you move downward along a demand curve, that is an increase in quantity demanded.

Substitutes vs. Complements

- Substitutes: two goods for which an increase in the price of one leads to an increase in the demand for the other. Ex: hot dogs and hamburgers. - Complements: two goods for which an increase in the price of one leads to a decrease in the demand for the other. Ex: peanut butter and jelly.

Shift vs. Movement Along Curve: Supply

- Supply: a shift in the S curve occurs when a non-price determinant of supply changes (like technology or costs). - Quantity Supplied: movement along a fixed S curve occurs when P changes.

Difference between Demand and Quantity Demand (QD) and how they appear on a graph:

- The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase. One determinant: the price. A POINT ON THE GRAPH. - The demand curve is a set of various quantities demanded (QD) at corresponding prices. THE CURVE ITSELF.

Difference between moving along a supply curve and shifting a supply curve:

- The supply curve shows how price affects quantity supplied. - A change in the price of the good changes QS and results in a movement along the S curve.