ECON 231 - Chapter 3

Law of diminishing marginal utility

For a given time period, the marginal utility or satisfaction gained by consuming equal successive units of a good will decrease as you consume more.

Price of Substitutes (Demand)

Price increase of Good A, will increase demand for Good B (demand increases for the cheaper substitute)

Law of Demand

Price increases, quantity demanded decreases; price decreases, quantity demanded increases... Ceteris paribus

Law of Supply

Price increases, quantity supplied increases; price decreases, quantity supplied decreases (Ceteris Paribus). Positive relationship between price and quantity supplied. Suppliers want to maximize product.

What happens to the price if there is a surplus?

Price will decrease.

What happens to the price is there is a shortage?

Price will increase.

Price System

market economies use prices to allocate resources, goods, and services (businesses and consumers communicate by buying or not buying goods)

A decrease in demand does what to the demand curve?

shift to the left

An increase in demand does what to the demand curve?

shift to the right

Supply

the maximum amount of a product that sellers are willing and able to provide over some time period at various prices (ceteris paribus)

Equilibrium Quantity

the output at which Qs=Qd

Expectations

this can increase or decrease demand... gas prices expected to rise next week, so demand today increases

A change in supply occurs when one of more determinants of supply changed. (T/F?)

TRUE

T/F? If the price of a product changes, it does NOT affect demand... it affects quantity demanded.

TRUE

Costs of Resources

supply increases if the costs of resources used decreases

Equilibrium Price

the price at which Qs=Qd

If both curves shift, what happens to equilibrium P and Q?

Equilibrium Quantity will increase, but the equilibrium price depends on the magnitude of the shifts

What is the only determinant that affects both supply and demand?

Expectations (of future prices)

Markets

an institution that brings buyers and sellers together (mall, flea market, eBay, Amazon, Facebook Groups, etc.)

When does demand change?

when one or more of the determinants of demand changes... the entire demand curve is shifted

Determinants of Supply (6)

1. Production Technology 2. Costs of Resources 3. Prices of other commodities 4. Expectations 5. Number of sellers 6. Taxes and subsidies

Determinants of Demand (5)

1. Tastes and Preferences 2. Income 3. Prices of related goods, substitutes and complements 4. Number of Buyers 5. Expectations about future prices

Expectations (Supply)

An expectation of a future rise in prices will decrease supply now.

Prices of Other Goods and Commodities

An increase in the profitability of electric cars will decrease the supply of electric cars (Corn and soybeans... if corn prices rise, supply of soybeans will decrease)

Number of Buyers

As more consumers enter a market, demand increases.

Number of Sellers

As more producers enter a market, supply increases.

A decrease in demand does what to equilibrium P and Q?

Causes them to fall to a lower P and Q.

An increase in demand does what to equilibrium price and quantity?

Causes them to move to a higher P and Q

Tastes and Preferences

Demand will increase for products that come into fashion

Answer what question for supply...

Does this make production cheaper or more expensive?

A decrease in supply does what to equilibrium P and Q?

Higher P, Lower Q

Price of Complements (Demand)

If the price of a complement decreases, the demand for the original good increases. (Gas price increases are bad for auto sales.)

An increase in supply does what to equilibrium P and Q?

Lower Price, Higher Quantity

Income

Normal Goods (electronics, new cars, organic food, etc)- demand increases as incomes rise Inferior Goods (ramen noodles, pop tarts, etc) - demand decreases as incomes rise

Price Expectations will affect supply and demand in ______________ ways.

OPPOSITE

Market Equilibrium

Occurs when quantity supplied equals quantity demanded (Qs=Qd)

What sends signals in free markets?

PRICE

Substitution

People substitute lower priced goods for higher priced goods

If prices are below equilibrium (Qd > Qs), what occurs?

SHORTAGE

If prices are above equilibrium, what occurs? (Qs > Qd)

SURPLUS

Production Technology

Supply increases when technology movements lower the cost of production

Demand

The maximum amount of a product that buyers are WILLING and ABLE to purchase over some time period at various prices (ceteris paribus)... what we want at each and every price

Quantity Supplied

What is being supplied/produced at one specific price.

Quantity Demanded

What we want at one specific price

Taxes

decrease supply

Subsidies

increase supply