Economics Chapter 3

competitive market equilibrium

a market equilibrium with many buyers and sellers

A change in quantity demanded refers to

a movement along the demand curve as a result of a change in the product's price

shortage

A situation in which quantity demanded is greater than quantity supplied

Ceteris Paribus

holding everything else constant

quantity demanded

the amount of a good or service that a consumer is willing and able to purchase at a given price

substitution effect

the change in the quantity demanded of a good that results because a change in price makes the good more or less expensive relative to other goods that are substitutes

If a firm expects that the price of its product will be higher in the future

it has an incentive to decrease supply now and increase it in the future

demand schedule

a table that shows the relationship between the price of a product and the quantity demanded

A change in the number of firms in the market will

change supply; When new firms enter a market, the supply curve shifts to the right, and when existing firms leave, or exit, a market, the supply curve shifts to the left. In early 2017, for instance, PepsiCo entered the market for premium bottled water when it introduced LIFEWTR, which shifted the market supply curve to the right.

an increase in the price of a complement in production

shifts the supply curve to the right because more of the good and the complementary good are produced

demand curve

shows the relationship between the price of a product and the quantity of the product demanded

supply curve

shows the relationship between the price of a product and the quantity supplied

quantity supplied

the amount of a good or service that a firm is willing and able to supply at a given price; Holding other variables constant, when the price of a good rises, producing the good is more profitable, and the quantity supplied will increase. When the price of a good falls, selling the good is less profitable, and the quantity supplied will decrease

when a shift in a demand or supply curve causes a change in equilibrium price

the change in price does not cause a further shift in demand or supply. For supply to decrease, the whole curve must shift.

Demographics

the characteristics of a population with respect to age, race, and gender; As the demographics of a country or region change, the demand for particular goods will increase or decrease because different categories of people tend to have different preferences for those goods

market demand

the demand by all the consumers of a given good or service

The distinction between a normal and an inferior good is

when income​ increases, demand for a normal good increases while demand for an inferior good falls

normal good

when the demand for the good increases following a rise in income and decreases following a fall in income

technological change

a positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs

A change in demand refers to

a shift of the demand curve; A shift occurs if there is a change in one of the variables—other than the price of the product—that affects the willingness of consumers to buy the product

change in supply

a shift of the supply curve; The supply curve will shift when there is a change in one of the variables—other than the price of the product—that affects the willingness of suppliers to sell the product

market equilibrium

a situation in which quantity demanded equals quantity supplied

Supply schedule

a table that shows the relationship between the price of a product and the quantity supplied

An increase in productivity

shifts the supply curve to the right because the costs of producing the good fall

substitutes in production

alternative goods that a firm could produce

income effect

(of a price change) refers to the change in the quantity demanded of a good that results because a change in the good's price increases or decreases consumers' purchasing power

If a firm enters a market, as PepsiCo entered the market for premium bottled water, the equilibrium price will fall, and the equilibrium quantity will rise

As PepsiCo enters the market, a larger quantity of premium bottled water will be supplied at every price, so the market supply curve shifts to the right, from S1 to S2, which causes a surplus at the original price, P1. The equilibrium price falls from P1 to P2. The equilibrium quantity rises from Q1 to Q2.

an increase in the price of an input

Shifts the supply curve to the left because the costs of producing the good rise

substitutes

Goods and services that can be used for the same purpose; When two goods are substitutes, the more you buy of one, the less you will buy of the other. A decrease in the price of a substitute causes the demand curve for a good to shift to the left. An increase in the price of a substitute causes the demand curve for a good to shift to the right.

premium bottled water

Suppose that the price in the market for premium bottled water was $2.00 rather than the equilibrium price of $1.50. As Figure 3.8 shows, at a price of $2.00, the quantity of bottles supplied would be 6 million, and the quantity of bottles demanded would be 4 million

premium bottled water

If, however, the price were $0.50, the quantity demanded would be 7 million bottles, and the quantity supplied would be 3 million, as shown in Figure 3.8. When the quantity demanded is greater than the quantity supplied, there is a shortage in the market. In this case, the shortage is equal to 4 million bottles (7 million 2 3 million 5 4 million). When a shortage occurs, some consumers will be unable to buy premium bottled water at the current price. In this situation, firms will realize that they can raise the price without losing sales. A higher price will simultaneously increase the quantity supplied and decrease the quantity demanded. This adjustment will reduce the shortage, but as long as the price is below $1.50, there will be a shortage, and upward pressure on the price will continue. Only when the price rises to $1.50 will the market be in equilibrium.

variables that can influence market demand

Income Prices of related goods Tastes Population and demographics Expected future prices

A change in quantity supplied

Movement along the supply curve caused by a change in price.

A market that is not in equilibrium

Moves toward equilibrium; Once a market is in equilibrium, it remains in equilibrium

premium bottled water

Suppose that the market demand curve in Figure 3.1 represents the willingness and ability of consumers to buy premium bottled water during a day when the average price of regular bottled water is $0.75. If the average price of regular bottled water falls to $0.65, consumers will demand fewer bottles of premium water at every price, which shifts the demand curve for premium bottled water to the left.

premium bottled water

Suppose that the market demand curve in Figure 3.1 represents the willingness of consumers to buy premium bottled water at a time when the average price of a gym membership is $40 per month. If the price of gym memberships drops to $30 per month, consumers will buy more gym memberships and more premium bottled water, so the demand curve for premium bottled water will shift to the right.

premium bottled water

Suppose that the market demand curve in Figure 3.1 represents the willingness of consumers to buy premium bottled water when average household income is $56,000. If average household income rises to $58,000, the demand for premium bottled water will increase, shifting the demand curve to the right

premium bottled water

When PepsiCo entered the market by selling LIFEWTR, the market supply curve for premium bottled water shifted to the right. Figure 3.10 shows the supply curve shifting from S1 to S2. When the supply curve shifts to the right, there will be a surplus at the original equilibrium price, P1. The surplus is eliminated as the equilibrium price falls to P2 and the equilibrium quantity rises from Q1 to Q2

taste

a catchall category that refers to the many subjective elements that can enter into a consumer's decision to buy a product; when consumers' taste for a product increases, the demand curve will shift to the right, and when consumers' taste decreases, the demand curve will shift to the left.

When the demand curve shifts to the left

both the equilibrium price and quantity will decrease

premium bottled water

ecause premium bottled water is a normal good, when incomes increase, the market demand curve shifts to the right. Figure 3.9 shows the effect of a demand curve shifting to the right, from D1 to D2. This shift causes a shortage at the original equilibrium price, P1. To eliminate the shortage, the equilibrium price rises to P2, and the equilibrium quantity rises from Q1 to Q2. In contrast, if the price of a substitute good, such as regular bottled water, were to fall, the demand for premium bottled water would decrease, shifting the demand curve to the left

complements

goods and services that are used together; When two goods are complements, the more consumers buy of one, the more they will buy of the other. A decrease in the price of a complement causes the demand curve for a good to shift to the right. An increase in the price of a complement causes the demand curve for a good to shift to the left.

complements in production

goods that are produced together; For example, the same geological formations that contain oil usually also contain natural gas. If the price of oil rises, oil companies that begin pumping more oil from these formations will also produce more natural gas. As a result, an increase in the price of oil will cause the supply curve for natural gas—a complement in production—to shift to the right

Law of Supply

holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied

an increase in income (and the good is inferior)

shifts the demand curve to the left; consumers spend less of their higher incomes on the good

an increase in the price of a complementary good

shifts the demand curve to the left; consumers buy less of the complementary good and less of this good

an increase in population

shifts the demand curve to the right; additional consumers result in a greater quantity demanded at every price

an increase in taste for the good

shifts the demand curve to the right; consumers are willing to buy a larger quantity of the good at every price

an increase in the price of a substitute good

shifts the demand curve to the right; consumers buy less of the substitute good and more of this good

purchasing power

the quantity of goods a consumer can buy with a fixed amount of income; When the price of a good falls, the increased purchasing power of consumers' incomes will usually lead them to purchase a larger quantity of the good. When the price of a good rises, the decreased purchasing power of consumers' incomes will usually lead them to purchase a smaller quantity of the good.

If an existing firm exits the market

the supply curve will shift to the left, causing the equilibrium price to rise and the equilibrium quantity to fall

inferior good

when the demand for it decreases following a rise in income and increases following a fall in income

Whether the equilibrium price in a market rises or falls over time depends on

whether demand shifts to the right more than does supply

​"An increase in supply decreases the equilibrium price. The decrease in price increases​ demand"

​false: decreases in price affect the quantity​ demanded, not demand

an increase in the price of a substitute in production

shifts the supply curve to the left because more of the substitute is produced and less of the good is produced

an increase in the number of firms in the market

shifts the supply curve to the right because additional firms result in a greater quantity supplied at every price

surplus

A situation in which quantity supplied is greater than quantity demanded; In this case, the surplus is equal to 2 million bottles (6 million − 4 million = 2 million). When there is a surplus, firms will have unsold goods piling up, which gives them an incentive to increase their sales by cutting the price. Cutting the price will simultaneously increase the quantity demanded and decrease the quantity supplied. This adjustment will reduce the surplus, but as long as the price is above $1.50, there will be a surplus, and downward pressure on the price will continue. Only when the price falls to $1.50 will the market be in equilibrium.

premium bottled water

If the price of premium bottled water falls from $2.50 to $2.00, the result will be a movement along the demand curve from point A to point B—an increase in quantity demanded from 3 million bottles to 4 million. If consumers' incomes increase, or if another factor changes that makes consumers want more of the product at every price, the demand curve will shift to the right—an increase in demand. In this case, the increase in demand from D1 to D2 causes the quantity of premium bottled water demanded at a price of $2.50 to increase from 3 million bottles at point A to 5 million at point C.

premium bottled water

If the price of premium bottled water rises from $2.00 to $2.50, the result will be a movement up the supply curve from point A to point B—an increase in quantity supplied from 6 million to 7 million. If the price of an input decreases, or if another factor changes that causes sellers to supply more of a product at every price, the supply curve will shift to the right—an increase in supply. In this case, the increase in supply from S1 to S2 causes the quantity of premium bottled water supplied at a price of $2.50 to increase from 7 million at point B to 9 million at point C.

premium bottled water

In Figure 3.7, we bring together the market demand curve and the market supply curve for premium bottled water. Notice that the demand curve crosses the supply curve at only one point. This point represents a price of $1.50 and a quantity of 5 million bottles per day. Only at this point of market equilibrium is the quantity of premium bottled water consumers are willing and able to buy equal to the quantity of premium bottled water firms are willing and able to sell. In this case, the equilibrium price is $1.50, and the equilibrium quantity is 5 million bottles.

premium bottled water

PepsiCo produces Aquafina bottled water, Tropicana orange juice, and Pepsi-Cola, among other beverages. If the price of carbonated soft drinks decreases relative to the price of premium bottled water, soft drinks will become less profitable, and Coca-Cola, PepsiCo, and other firms will shift some of their productive capacity away from soft drinks and toward premium bottled water. The firms will offer more bottles of premium water for sale at every price, so the supply curve for premium bottled water will shift to the right

variables that can affect market supply

Prices of inputs Technological change Prices of related goods in production Number of firms in the market Expected future prices

At a competitive market equilibrium

all consumers willing to pay the market price will be able to buy as much of the product as they want, and all firms willing to accept the market price will be able to sell as much of the product as they want; As a result, there will be no reason for the price to change unless either the demand curve or the supply curve shifts

A shift of a demand curve is

an increase or a decrease in demand.

A movement along a demand curve is

an increase or a decrease in the quantity demanded

input

anything used to produce a good or service; The factor most likely to cause the supply curve for a product to shift is a change in the price of an input

an increase in the expected future price of the product

shifts the supply curve to the left because less of the good will be offered for sale today to take advantage of the higher price in the future

premium bottled water

if the price of electrolytes used in many premium bottled waters or the price of plastic bottles rises, the cost of producing premium bottled water will increase, making it less profitable at every price. The supply of premium bottled water will decline, and the market supply curve will shift to the left. Similarly, if the price of an input falls, the supply of premium bottled water will increase, and the market supply curve will shift to the right.

law of demand

inverse relationship between the price of a product and the quantity of the product demanded; Holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease. The law of demand holds for any market demand curve.

Negative technological change

is relatively rare, although it could result from an earthquake or another natural disaster or from a war that reduces the ability of firms to supply as much output with a given amount of inputs; Negative technological change will raise firms' costs, and firms will earn lower profits from producing the good. Therefore, negative technological change will cause the market supply curve to shift to the left.

Positive technological change

occurs whenever a firm is able to produce more output using the same amount of inputs. In other words, the productivity of the firm's workers or machines has increased

An increase in the expected price of the good in the future

shifts the demand curve to the right; consumers buy more of the good today to avoid the higher price in the future

an increase in income (and the good is normal)

shifts the demand curve to the right; consumers spend more of their higher incomes on the good