Economics Test- Chapter 3 sections 4-9
supply schedule
How much firms are willing to sell at various prices
Future Expectations of Price
If a seller expects the price of a good to rise in the future, the seller will store the goods now in order to sell more in the future
Changes in the number of competitors and supply
If more suppliers enter the market, the market supply of a good will rise and the supply curve will shift right
Impact of Ending Rent Control
If rents allowed to rise to market equilibrium to $900 a month, quantity of apartments would rise to 30,000 - people who could afford $900 a month would have easier time finding vacant apartments
Disequilibrium
If the market price or quantity supplied is anywhere but at equilibrium, the market is in a state of disequilibrium
Surplus
If the price is too high, the market will face the problems of surplus (excess supply)
Prices help consumers
choose among similar products
As a consumer you have the power to
choose what price to buy an item at
email allows people to
communicate in an instant
resources go to uses that
consumers value most highly
If a heat wave is forecast,
consumers will purchase more air conditioners-> price of air conditioners would increase
Government is unable to
control all the supply of goods passing through the economy
excise taxes increase the
cost and decrease the supply, supply curve shifts to the left
production costs
costs associated with the actual production of goods or services
Market benefits
In any market, supply and demand will be equal at only one price and one quantity- at equilibrium, buyers will purchase exactly as much of a good as firms are willing to sell
WWII US example
Instituted temporary price controls and shortages at home to ensure enough resources were available for the military
effects of rent control
Long waiting lists, discrimination by landlords, lottery system, bribery used to allocate them- must be lucky or inherit one rom family
Price Ceiling
Maximum price that can be legally charged for a good or service
Price Floors
Minimum price, set by the government, that must be paid for a good or service
The immediate effects of a shortage are
People stand in line up at stores or storm the internet to buy the hard to find item... price goes up!
equilibrium
Point where demand and supply come together- point of balane at which the quantity demanded equals the quantity supplied- market for a good is stable
Flexibility
Prices can be easily increased to solve a problem of a shortage, and they can just as easily be decreased to eliminate a problem of surplus
what creates the law of supply?
Two movements of individual firms changing their level of production and firms entering or exiting the market
The supplies of imported goods are affected by changes in other countries
US imports carpets from India; An increase in the wages if Indian workers would decrease the supply of carpets to the US market, shifting the supply curve to the left
fixed costs
a cost that does not change, no matter how much of a good is produced
variable cost
a cost that rises or falls depending on how much is produced
excise taxes
a government can reduce the supply of some goods by placing an excise tax on them
In a free market, prices offer
a number of advantages to both consumers and producers
when a factor other than the price affects output,
a whole new schedule must be made
supply
amount of goods available
input costs
any change in the cost of an input used to produce a good such as raw materials, machinery, or labor will affect supply
They will continue to sell at that price until there are changes to the demand/supply curve which
creates pressures to raise or lower prices and eventually, a new equilibrium
very responsive to change
elastic
examples of variable costs
electricity bill, heating bill, cost of workers
In the case of a hot toy, the shortage appears as
empty shelves or long lines, search costs
by raising and lowering the costs of producing goods, the government can
encourage or discourage an entrepreneur or an industry within the country or abroad
the government dictated what
farmers should produce and the quantity
search costs
financial and opportunity costs that consumers pay in searching for a product or service
comparing these two helps us
find a common ground for the two sides
Buyers willing to purchase goods at the equilibrium price will
find ample supplies on store shelves- firms that sell equilibrium will find enough buyers for their goods
Businesses prosper when they
find out what consumers want and then provide it!
to find the best level of output
find the output level where marginal revenue is equal to marginal cost
elasticity of supply in the long run
firms are more flexible, so supply is more elastic; like demand, supply becomes more elastic over time
long run
firms are more flexible- elastic supply
short run
firms cannot easily change output levels- inelastic supply
the shutdown decision
firms should keep the factory open if the total revenue from the goods the factory produces is greater than the cost of keeping it open
when will a business replace a factor that is operating at a loss?
firms will build a new factory and stay in the market only if the market price of beanbags is high enough to cover all the costs of production including the cost of building a new factory
In short, prices help goods
flow through the economy without a central plan
supply graph is read
from left to right
subsidy
government payment that supports a business or market
1930s
great depression, government set minimum prices for commodities
supply graph moves toward
higher output levels and higher prices
sellers want
hope to sell at the highest possible price
Although markets trend toward equilibrium, the government may
intervene to control prices
when a firm is flexible
its responsive to market conditions
when people join the market to profit from a trend,
its the law of supply
increasing marginal returns
labor increases as number of workers increase
what will be used for their most valuable purposes?
land, labor, capital
Rent control limits
landlords' profits, so they cut costs- don't paint, no new garden, no repairs- if there is a waiting list, no incentive to work hard and attract renters
supply graph illustrates
law of supply
Unlike minimum wage, price floors have no
legal minimums set for buyers
if a price falls, firms produce
less and may leave market
advances in technology can
lower production costs in many industries
technology
lowers cost and increases supply at all price levels
Buyers always want to pay the
lowest possible price
High price encourages owners to
make more pizza but customers are discouraged from buying it- pizza is more expensive than other menu items
regulations increase the cost of
manufacturing cars and reduces supply; supply curve shifts to the left
firms enjoy increase
marginal returns
When the market is in disequilibrium and prices are flexible,
market forces will push the market toward equilibrium
the firm's goal is to
maximize profit
elasticity of supply
measure of the way quantity supplied reacts to a change in price
Free market pricing distributes goods through
millions of decisions made daily by consumers and suppliers
change in the good's prices
moves the seller from one row to another on the supply schedule, but does not change the supply schedule itself
Prices provided an easy way for you to
narrow your choices to a certain price range
does efficient resource allocation take place with central control?
no
On other hand, when rent control is ended, some people living in rent-controlled apartments may
no longer be able to afford higher rents- renters may be priced out of apartments by people able to pay
Whatever the cause, the hard-to-get item is
no longer so hard to get... and the shortage ends
do consumers realize they pay excise taxes?
no they are built into the cost of the good
what does a free market system cost to administer?
nothing
as prices rise, producers will
offer more of a good and more suppliers will enter the market to get a share of their profits
firms aim for
optimal number of workers
If the shortage continues,
other suppliers will seek to enter the market; Demand is up, prices are up
Sellers do not want to waste their resources on a surplus
particularly when goods cannot be stored long, like pizza
the black market allows consumers to
pay more so they can buy a product when rationing makes it otherwise unavailable
diminishing marginal returns
point at which labor decreases as number of workers increases
Prices as an incentive
prices communicate to both buyers & sellers whether goods or services are scarce or easily available; prices can encourage or discourage production
producers red light
produce less
producers green light
produce more
subsidies lower costs allowing the firm to
produce more goods
as prices of goods rise, firms will
produce more in order to earn additional revenue
law of supply
producers offer more of a good as its price increases and less as its price falls
excise taxes increase
production costs by adding an extra cost for each unit sold
market entry
profits appeal to producers in the market and prospective people
governments in developing countries subsidize manufacturers to
protect young growing industries from foreign competition
Based on your income, you will
purchase certain items for a specific price
surplus exists when
quantity supplied exceeds quantity demanded
law of supply
quantity supplied increases as the price increases
market supply curve is a graph of
quantity supplied of a good by all suppliers at various prices
Federal government sets a base level for minimum wage, but
states can make their own minimum wages higher
when the price goes down,
suppliers are discouraged from producing as much as before
When price rises enough to close the gap
suppliers have found the highest price the market can bear
when price goes up,
suppliers recognize the chance to make more money and produce more
As long as there is a shortage and the quantity demanded exceeds the quantity supplied,
suppliers will keep raising the price
what creates prices in a free market?
supply and demand
this lowers the cost, leading to
supply increases, supply curve shifts to the right
elasticity of supply in the short run
supply is inelastic because a firm cannot easily change its output level
market supply schedule resembles
supply schedule of a single firm since all will charge the same price in the same area within a same range, but supplied quantities are much larger because there are many firms in a community
Prices also allow producers to
target the audience they want with the products that will sell best to that audience
quantity supplied
the amount a supplier is willing and able to supply at a certain price
to find the level of output with the highest profit, we look for
the biggest gap between total revenue and total cost
law of supply develops from
the choices of both current and new producers of a good
marginal cost
the cost of producing one more unit of a good
behind all hiring decision's is
the firm's goal
when prices fell below a certain level,
the government, created demand by buying excess crops
Disequilibrium:
the market is thrown out of balance
There is a positive relationship between
the numbers of suppliers and the market supply of a good
Whether the cause is increase in demand or decrease in demand,
the result is the same
excise taxes are meant to discourage
the sale of some goods
total cost
the sum of fixed and variable costs
If suppliers stop producing a good and leave the market
the supply will decline
the information in a supply schedule could change based on
what other variables are considered
disequilibrium occurs
when quantity supplied is not equal to quantity demanded in a market
supply graph
when the data points in the supply schedule are graphed, they create a supply curve
Renters would have
wider selection of apartments, landlords would have greater incentive to maintain buildings, invest in new construction
a rise in the cost of an input
will cause a fall in supply at all price levels because the good has become more expensive to produce
a fall in the cost of an input
will cause an increase in supply at all price levels
negative marginal returns
workers often get in each other's way and disrupt production, so output decreases
Sellers can included
workers, who sell their labor
The available toys must be distributed
-limited quantities -first come first serve
Where do Firms Produce?
-Many firms choose to be located near transportation -Other firms choose to locate close to suppliers so they do not need to transport the inputs -Other firms will choose to locate close to consumers -Lastly some firms choose to locate near human capital (specialized workers) or certain cities
Cabbage patch dolls example
-Sudden increase in demand told suppliers that people wanted more of the doll -Consumers will pay higher price -Incentive for new firms to enter the market
the balance Can happen in two ways
-Fads end -New suppliers fill in the gap
Changes in the global economy
A large and rising share of goods and services are imported
The black market
A market in which goods are sold illegally, without regard for government controls on price of quantity
US imports oil from Russia
A new oil discovery in Russia could increase the supply of oil to the US market and shift the supply curve to the right
Rationing
A system of allocating scarce goods and services using criteria other than price
How does the market react to a shortage?
Disequilibrium:
Soviet Union example
Goods were often inexpensive, but people had to wait on long lines for hours for eggs or soap
regulation
Government intervention in a market that affects the price, quantity, or quality of a good
Rent Control
Governments will sometimes place price ceilings on goods that are considered "essential" and might become too expensive for consumers
To graph a combined graph
Graph both the supply schedule and the demand schedule and locate the point at which the supply curve and the demand curve intersect; At that point, quantity supplied equals quantity demanded
MINIMUM WAGE
Sets minimum price that an employer can pay a worker for one hour of labor
Shortage
Shortage occurs when the quantity demanded in a market is more than the quantity supplied
demand schedule
Shows much of a good consumers are willing to buy at various prices
advantages to both consumers and producers
Simple purchases would be much more complicated and inefficient without the price system
Supply shock example
Sudden shortage of wheat-> raise price resolves shortage as there is not enough time to plant a new crop
an excise tax is a tax on
The production or sale of a product
government has the power to
affects the supplies of many types of goods
All of the advantages of a free market allow prices to
allocate, or distribute, resources efficiently
Cost of rent control
although governments pass rent control laws to help those with greatest need, few actually benefit from rent control
in time, supply and demand will
balance out again
Consumers who can afford the higher price will
be the only consumers still in the markekt and the market will settle at a new equilibrium.
Price ceilings are set
below equilibrium prices
The end of rent control
benefits some people and hurts others- most economists agree that the benefits of ending rent control exceed the costs and suggest that there are better ways to help poor households find affordable housing
When a market is at equilibrium
both buyers and sellers benefit
consumers red light
buy less
Consumers Green light
buy more
automation
can save on labor costs
price floors ensure that
certain sellers receive at least a minimum reward for their efforts
marginal product of labor
change in output from hiring one more worker
the market is thrown out of balance
demand increases and supply decreases
The search for profit
drives supplier's decisions
Imperfect information
if buyers and sellers do not have enough information, they may not make the choice that is best for them
Imperfect competition:
if only a few firms are selling a product there might not be enough competition to lower market prices to the true equilibrium
price increase
incentive for new firms to enter the market to make their own profits
not responsive to change
inelastic
factors that shift the supply curve
input costs, technology, government policies and changes in supply, subsidies, excise taxes, regulations, changes in the economy, future expectations, changes in competitions
regulation is an indirect way of
raising or lowering supply of goods
When there is a shortage, profit-seeking sellers
realize they can raise prices to earn more profits- for these reasons, market prices move toward the equilibrium level
examples of fixed costs
rent, property taxes, cost of building
technology causes a shift in the supply curve to the
right
a change in the quantity supplied
rise or fall in price will cause quantity supplied to change but not supply schedule
effect of rising costs
rising costs increase costs and decrease supply at all price levels; supply curve will shift to the left
many rent-controlled apartment buildings become
run-down, renters have to wait months to have routine problems fixed
Voted out in 1996 since they
seemed to be in conflict with free market principles
If the price of a goods is expected to drop in the near future
sellers will earn more money by placing goods on the market immediately before the price falls
When actual price in a market is below equilibrium price,
shortages occurs because the low price encourages buyers and discourages sellers
horizontal axis
shows quantity of good supplied, not the quantity demanded
supply schedule
shows the relationship between price and quantity supplied for a specific good or how much of a good a supplier will offer at various prices
market supply schedule
shows the relationship between prices and the total quantity supplied by all firms in a market
Negative externalities
side effects of production that impose unintended costs (air and water pollution)
computers have
simplified tasks and cut costs in many fields
in france, government subsidies
small farms to protect the lifestyle and character of the French lifestyle
adding workers helps to
specialize in the tasks of output
supply, demand and prices will gradually move to
their equilibrium price
If a firm is already earning profit by selling a good,
then an increase in the price will increase the firm's profits and they will produce more
diminishing marginal returns is when
there are too many workers, not enough capital to be productive; workers have limited amount of capital
elasticity of supply and time
time determines whether the supply of a good is elastic or inelastic
Government requiring car manufacturers to install technology
to reduce pollution from auto exhaust
market supply schedules show
total supply of a city
Changes in supply and demand
upset market equilibrium and cause prices to change.
