Econ Chapter Four: Equilibrium

effect of price drop

: computer chips are an input so decrease in price of computer chips increases supply of laptops, so shifts to the rights, market adjusts to new equilibrium, at adjusted price we currently have a surplus, at price of pa quantity supplied exceeds quantity demanded, firms will compete to lower prices and as prices fall supply decreases, as price falls demand increases until we get to a price where quantity demanded is equal to quantity supplied

- Efficiency of market

gains from trade maximized at equilibrium price and quantity means that 1) The supply of goods is bought by buyers with the highest willingness to pay 2) The supply of goods is sold by the sellers with the lowest costs 3) Between buyers and sellers, there are no unexploited gains from trade or any wasteful trades

increase

in demand causes shortage at original price which causes competition

- Surplus

is a situation in which the quantity supplied is greater than the quantity demanded - What will suppliers do if they cannot sell all of their output ? hold a sale! Each seller will reason that by pricing just a little bit below competitors they will be able to sell more - COMPETITION WILL PUSH PRICES DOWN WHENEVER THERE IS A SURPLUS , as competition pushes prices down, quantity demanded increases and quantity supplied decrease

free market

maximizes producer plus consumer surplus

market shows

no only the stuff above but also that not everybody will be able to buy and sale from the product if just focus on new equilibrium see that only people able to buy new price will be able to buy it anyone less will not be able to buy it, same for suppliers

shortage

situation in which quantity demanded is greater than quantity supplied at a given price, buyers will offer higher prices as not enough product available

the supply and demand curves

when you put the ____ together you get to see how quantities are determined, why some are able to buy the product and others aren't

predicts that a free market

will maximize gains from trade and that the supply of goods must be bought by the demanders with the highest willingness to pay, the supply of goods must be sold by the suppliers with the lowest cost, and the quantity traded should be equal what it says

predictions

- Another way to test model is to examine its ________about what happens when the demand or supply curve shifts

shortage

- At original price we will have a _______as quantity demanded is over supplied so buyers compete to drive prices up and as price increases quantity supplied increases until new equilibrium,

shifting supply and demand curves

- Imagine technological innovations reduce costs of producing a good, a fall in costs shifts the supply curve down and to the right, the results of lower costs is a lower price and an increase in quantity - At the old equilibrium price there is now a surplus- now that their costs have fallen, suppliers are willing to sell more at the old price than demanders are willing to buy, this excess supply however is temporary as competition between sellers pushes prices down and as prices fall the quantity demanded increases until the New Equilibrium price and Quantity are established. At the new equilibrium, the quantity demanded equals the quantity supplied - What about a decrease in supply? It will raise market price and reduce the market quantity, so opposite of increase in supply - Decrease in demand will tend to decrease price and quantity

supply

- Increase in ________reduces the equilibrium price and increases the equilibrium quantity, increase in supply pushes the price down and so causes an increase in the quantity demanded, increase in quantity demanded is movement along demand curve as demand has not changed only the quantity demanded, changes in the quantity demanded are always caused by changes in supply - Shifts in supply curve cause movements along the demand curve

oil prices

- Mid 70s to 80s _____s spiked because of supply side shocks, was in Israel and Iranian revolution, lots of disturbances in supply lines which decreases number of suppliers and brings up prices

compete

- Sellers want higher prices while buyers want lower prices so we often think sellers __________against buyers - Regardless of what sellers want, what they do when they compete is lower prices, SELLERS COMPETE AGAINST OTHER SELLERS - Buyers may want lower prices but what they do when they compete is raise prices, BUYERS COMPETE WITH OTHER BUYERS

maximized

- Smith's model showed the producer plus consumer surplus or total surplus was ______, total surplus was very close to being maximized throughout the experiment

no exploited gains from trade

- Suppose quantity is equal to the equilibrium quantity, at quantity of 70, quantity demanded and quantity supplied are both 70, CONCLUSION: NO EXPLOITED GAINS FROM TRADE

decreases

- When price of laptop ________laptops and software are complements so when price of laptops fall demand will increase for software, so demand will for software will increase

unexploited gains from trade

AT ANY QUANITYT LESS THAT THE EQUILIBRIUM QUANITYT.

demanded

Increase in the quantity ________- is movement along a fixed demand curve, an increase in demand is a shift of the entire demand curve

decrease

_____in supply then increase in equilibrium price and supply

Equilibrium price

price at which quantity demanded equals quantity supplied, suggests everyone who wants to buy a product at a specific price is able to get it no reason for price or quantity to change

- Gains from trade

producer plus consumer surplus- are maximized at the equilibrium price and quantity. Maximizing the gains from trade, however, requires more than just producing at the equilibrium price and quantity. Ina addition, goods must be produced at the lowest possible cost and they must be used to satisfy the highest value demands - When we say that a free market maximizes the gains from trade, we mean three closely related things: 1) The supply of goods is bought by the buyers with the highest willingness to pay 2) The supply of goods is sold by the sellers with the lowest costs 3) Between buyers and sellers, there are no unexploited gains from trade and no wasteful trades - Together these conditions imply that the gains from trade are maximized - Under the right conditions, the pursuit of self-interest leads not to chaos but to a beneficial order - Maximization of consumer plus producer surplus in markets populated solely by self-interest is one application of this central idea

equilibrium quantity

quantity at which the quantity demanded is equal to the quantity supplied - In a free market, unexploited gains from trade won't last long - In a f ree market the quantity bought and sold will increase until the equilibrium quanityt is reached - Gains from trade push the quantity toward the equilibrium quantity - If quantity supplied exceeds the equilibrium quantity, it costs sellers more to produce a barrel of oil than that barrel of oil is worth to buyers - In a free market, the quantity bought and sold will decrease until the equilibrium quantity is reached - Resources are wasted if the quantity exceeds the equilibrium quantity's - If we waste resources producing barrels of oil for $50 that are with only $15, we have fewer resources to produce goods that cost only %32 but that people value at $75. We have means producing neither to little of a good nor too much of a good, markets can help us achieve this goal

- Shortage

situation in which quantity demanded is greater than the quantity supplied - Raise prices, buyers also have an incentive to offer higher prices when there is a shortage b/c when they conat buy as much as they want at the going price, they will try to outbid other buyers at offering sellers a high price - COMPETITION PUSHES PRICES UP WHENEVER THERE IS A SHORTAGE - As prices are pushed up, quantity supplied increases and quantity demanded decreases until there is no longer an incentive for prices to rise and equilibrium is restored - The equilibrium price: price at which the quantity demanded is equal to the quantity supplied - THE EQUILIBRIUM PRICE IS STABLE BECAUSE AT THE EQUILIBRIUM PRICE THE QUANITYT DEMANDED IS EXACTLY EQUAL TO THE QUANITYT SUPPLIED - Since every byer can buy as much as he or she wants at athe equilibrium price, buyers don't have an incentive to push prices up

surplus

situation in which quantity supplied is greater than quantity demanded at a given price, sellers will offer lower prices as they compete against each other

potential gains from trade

so long as buyers are willing to pay more than sellers are willing to except

Vernon Smith

tested the supply and demand model in the lab, he took a group of undergrad students and broke them up into sellers and buyers, buyers were given a card that indicated their maximum willingness to pay, sellers had a card that indicated their cost, the minimum price t which they would be willing to sell, each student could earn a profit by the difference their willingness to pay or sell and the contract price, smith ran experiment for 5 periods each about 5 min long, Smiths markets converged rapidly to the equilibrium price and quantity exactly as predicted by supply and demand model,

- Equilibrium

the one point where the curves meet. The price at the meeting point is called the equilibrium price and the quantity at the meeting point is called the equilibrium quantity - Say equilibrium price is $30 and equilibrium quantity are 65, these are so because at any other price and quantity, economic forces are put in play that push prices and quantities towards these values - The equilibrium price and quantity are the only price and quantity that in a free market are stable