ECON Chapter 4

Shifts

A change in another determinant of the demand for a product shifts the demand curve

Expectations

A change in expectation will lead to a change in demand

Movements

A change in the price of a product will cause movements along the same demand curve for the product

Inferior good

A good for which other things equal an increase in income leads to a decrease in demand

Normal Goods

A good for which other things equal an increase in income leads to an increase in demand

The relationship between market demand and the price

An important property of market demand is that market quantity demanded and the price is negatively related. A price increase reduces the quantity demanded of the 2 individuals. The market quantity demanded decreases for a price increase

Taking stock

An increaee in market demand shifts the market demand curve to the right. whereas a decrease shifts in the market demand curve to the left

Input Prices

An increase in an input price increases the production cost. A firm will reduce its individual supply because the goods become less profitable to produce. Market supply decreases as individual supplies decrease at each price. Market supply curve shifts to the left if there is an increase in an input price

Individual demands

Are negatively related to the price. Market demand, the sum of individual demands, is also negatively related to the price. Demand curve is downward sloping

Technology

Determines the production process used in producing a good. If there is technological change and progress, production process becomes more efficient and productive

Market demand = market supply

Equilibrium no proce change

Market demand > market supply

Excess demand, shortage and price increase

Market demand < market supply

Excess supply, surplus and price decrease

Summary 4

For determining the market equilibrium in a perfectly competitive industry, identify the price so that demand is equal to supply

Number of sellers

If there are new producers entering the industry the market supply will increase and the market supply curve will shift to the right

Summary 5

If there is an economic event causing a change in one of the determining factors (other than the price) in demand and/or supply, equilibrium price and quantity will change

Summary 2

Individual supplies are positively related to the price. Market supply the sum of individual supplies is also positively related to the price. The supply curve is upward sloping

The relationship between market supply and the price

Individual supply increases with the price. The market supply increases with the price. Market supply is positively related to the price as seen in the market supply schedule. Market supply curve depicting the positive relationship between market supply and the price is upward sloping

Individual supply curve

It depicts a positive relationship between an individual supply and the price. It is upward sloping

Market demand curve

It depicts market demand at different prices. It is downward sloping because market demand and the price are negatively related

Number of buyers

Market demand increases as more consumers buy a product and thus the demand curve shifts to the right

Market demand schedule

Market quantity demanded at different prices. The sum of all the individual demands at different prices

Market Supply

Market quantity supplied at different prices. The sum of individual supplies at different prices

Idea of market equilibrium

Once the market has reached an equilibrium it will not make further charges. to determine equilibrium identify the price such that market demand=market supply. since demand is equal to supply the price does not need to change

Summary 1

Other determining factors affecting individual demands and the market demand are income, prices of related goods, number of buyers, and government policies. The demand curve will shift if there is a change in one of these factors

Summary 3

Other determining factors affecting individual supplies and thus market supply are input prices, number of sellers, technology, and government policies. The supply curve will shift if there is a charge in one of these factors

The law of demand

Other things equal the quantity demanded for a good decreases when its own price rises

Perfectly Competitive market

Required to meet the 3 conditions: The product is identical, there are many sellers and buyers, free entry and exit

Government policies such as taxes

Suppose the government imposes a tax on producers producing a product. Producers not only have to pay for all the inputs required in the production but they also need to pay for the tax. Taxes cause a reduction in profit and thus reduce supply. The supply curve shifts to the left

Changes in equilibrium

The price needs to adjust for bringing the market to the new equilibrium where demand equals to supply. A change in the equilibrium price leads to a change in equilibrium quantity

Individual demand

The quantity demanded for a good by an individual at different prices. Determining factors: price of products, income, prices of related goods, taste, government policies like taxes

Individual supply

The quantity supplied of a good by an individual producer at different prices

Complements

Two goods for which an increase (decrease) in the price of one leads to a decrease(increase) in the demand for the other

Substitutes

Two goods for which an increase(decrease) in the price of one leads to an increase (decrease) in the demand for the other