Macroeconomics Chapter 3
Quantity demanded
is the amount of a good or service that is demanded by individuals or a market for a specific price; its the amount an individual are willing to pay at each specific price
The demand curve is also known as the ________________
marginal benefit curve
Productive efficiency refers to:
producing items at the lowest possible cost -this is caused by using the best technology and using the mix of right resources to produce most effective means of production in the least costly way
Allocative efficiency is concerned with:
producing the combination of goods most desired by society. -producing the right mix of goods
What are inputs?
resources used in the production process -examples of inputs: work force labor, technology used in the production of labor, prices of resources used, etc.
price ceilings create
shortages, reductions in product quality, wasteful lines and other search costs, a loss of gains from trade, a misallocation of resources
rationing function of prices
the ability of the competitive forces of supply and demand to establish a price at which selling and buying decisions are consistent - the rationing function of price, the goods are in limited quantity, and many buyers are eying for it -it is the controlled distribution of scarce, resources, goods, or services, or an artificial restriction of demand -At equilibrium, quantity must be ratioed to the buyers. At a certain price, buyers will buy something. The buyers willing to purchase that scarce good will receive benefits for their purchase and the buyer who does not buy that good will receive some benefit from not purchasing that good -Rationing guarantees for a good to be purchased by competitive buyers in the market
What is consumer surplus?
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it -It's a measure of the additional benefit that consumers receive because they're paying less for something than what they were willing to pay. Consumer surplus = maximum price willing to pay - actual price
demand
the consumer willingness and ability to buy products
What is producer surplus?
the extra benefit producers receive from selling a good or service, measured by the price the producer actually received minus the price the producer would have been willing to accept
What are the relations of minimum wage and price ceilings?
the government rising the minimum wage which lead to a surplus -will only affect it if the eq. price is below price ceiling -the reason for the surplus: -->the demand for labor by businesses will be full b/c the wages has been moved critically high -Surplus in labor price=unemployment -A minimum wage occurs when price ceiling is above the equilbrium -this hurts workers who are looking for jobs leading for them to be unemployed
How do expectations affect supply?
(1) Expectation If producers expect price to increase in the future, this will decrease their supply today.
What are complements in production? How do they influence the supply curve?
(i) "Goods that are produced together (like byproduct)" Your supply of a good will increase if the price of a complement-in-production rises. ex: Gasoline and Asphalt Asphalt is a natural byproduct of refineries. If the price of asphalt rises (and the price of gasoline remains unchanged), it becomes more profitable to operate a refinery, even if the price of gasoline remains unchanged. Exxon's supply of a good (gasoline) will increase if the price of a complement-in-production (asphalt) rises.
What is the market demand?
- this measures the sum of the demand of all individual consumers; it measures the total quantity demanded by consumers for each specific price
What is a surplus? And what is it's relation to the changes within the market?
-Surplus occurs when there is an excess in production or quantity supplied -economic surplus is made up of two parts, consumer surplus and producer surplus
price floors create
-Surpluses -Lost gains from trade (deadweight loss) -Wasteful increases in quality -A misallocation of resources
How does the change in population influence the market demand?
-As the population increases, the overall market demand increases
Real life example of substitute and complements
-Crafty parents want to increase their kids study patterns and decrease their social media usage -in order to achieve this, parents increase complements to studying and decrease their symptoms -ex: parents buy complements like textbooks, laptops, desk chairs which complements studying -ex: substitutes they don't buy video games which are substitutes for studying
What are factors that lead to changes in the overall market demand?
-Income -Price of Related goods -Preference -expectations -number of buyers
What are interrelated goods? And do changes in prices of these goods shift the demand of these goods?
-Interrelated goods-Goods that can be produced with the same inputs including resources, equipment, and technology -Similar to prices of related goods in demand, prices of interrelated goods in supply are goods that are similar and can be produced by a business using the inputs(technology, labor, resources) that they have that their disposal There are two kinds of interrelated goods that affect the shift in demand 1.) Substitute in production 2.) Complements in Production
What are price ceilings?
-Prices ceilings are the maximum legal price that can be charged on a product ex: if the government make $300 the price ceiling for an apartment->this will lead to a shortage of apartments that are (meaning QS<QD) -will lead to blark market forming b/c the quantity demand is less than the quantity supplied meaning people will turn to illicit activities to get a good
What are substitute goods? And do they affect the overall shift within the market?
-Substitute goods serve as replacements for other good -An decrease in demand for one good may increase the demand for another similar/related product -For example, the increasing price of coke, may increase the overall market demand for Pepsi -the more closely related the product, the greater the DC shifts for good and their substitutes
How do taxes and subsidies affect supply?
-Taxes increase production costs for producers, thus shifting quantity supplied leftward along the supply curve and resulting in a higher price. -Subsidies shift quantity supplied rightward along the supply curve, increasing the price the producers receive for their product or service.
When we graph the market demand curve, what goes on the x and y axises?
-Y axis-price -x axis-quantity demand -P's before the q's
How does the law of supply explain the upward curve of the supply curve?
-a seller would rather produce more of something when the price or overall benefits that they receive is higher and greater than the cost of production -When the costs or prices of specific quantity of good increases, there is a greater incentive to produce more -Thus, as the price increases, the Qs increases leading to an upward curve
Explain how the demand curve is also the marginal benefit curve?
-according to the rational rule for buyers you should continue to purchase something until the MB=MC -the marginal cost is the extra cost for buying an extra unit of a good; extra costs are incurred by an extra unit purchased -if this is the case, the marginal cost is the price because it is the cost that individuals are willing to pay for an extra unit of good -MC=price -according to the rational rule (MC=MB-=>PRICE=MB) -your demand curve illustrates that as the price of something decreases, you are willing to consume more of a product because the benefits exceed the costs you pay for that item at a certain point -at some point, as you consume more of a product, you get less additional benefit for each extra good consumed
What does the Rational Rule for Buyers convey about consumer's buying preference?
-according to this principle, the RR rule for buyers suggests that we will only continue to buy a product only when the marginal costs = marginal benefits (MB=MC) -whenever the MB>MC we should take action b/c it increases our economic surplus which is the difference between the benefits and the costs and our overall satisfaction and well-being -we should ideally stop buying when our MB=MC or right before the point where the MB is still greater than the MC MB>MC
What is an increase in demand? What does it look like?
-an increase in demand, occurs when something changes in the market other than the price causes you to buy more at each specific price -there is a greater incentive to buy, ultimately when there is more incentive the quantity consumed increases at each possible price -an increase in market demand means there is an incentive to buy more at each and every possible -shifts your demand to the rights
What happens at the equilibrium price when the demand of a good decreaes?
a decrease in demand leads the overall equilibrium price to fall and quantity supplied to also decrease -seen in graph B
What is the principle of cerebis parabis?
-as things are equal -->when analyzing the demand curve we hold other factors constant especially in regards to the change in at quantity demanded each specific price -when we utilize this principle, we are only concerned with the price change
What are preferences and how do they they affect the overall demand for a product?
-changes in preference are changes in tastes for a specific product increases or decreases for the total quantity demanded for another product within that specific market -For example, a study at MSU shows that consuming more corn flakes increases life expectancy. Consumer preference will shift leading more people to buy more corn flakes and less of frosted flakes
Changes in the demand vs changes on the demand curve
-changes in the demand curve occur when outside factors other than the price affect the overall consumption of the product at any given price -changes within the demand curve: changes on the demand curve only refer to changes within the quantity demanded when the price changes; the demand curve is already the summation of the quantity demanded at each specific price under the constraints of cerebis parabis
What are some influences that shift the equilibrium to the right?
-increase in consumer demand -preferences of consumers increase the quantity demanded -demand increases overall -decrease in supply
Changes in Demand Curve
-occurs when other outside factors affect the overall buying patterns of the market; changes in the market occur when the total quantity demanded changes at every possible price -
Changes in supply demanded
-occurs when the total overall of quantity supplied changes at each specific price -An increase in supply shifts the supply curve to the right -A decrease in supply causes the supply curve to shift to the left
What is the main determinant that causes changes within the market/individual demand curve?
-one of the key factors that leads to changes within the demand curve is the change of price -according to the law of demand, you are willing to buy less of something or purchase a particular when the price of something decreases, and the WTP for something increases when the price decreases -it is the summation changes along a curve under the constraints of cerebis parabis are due to the changes in price (P Increase leads to Qd decrease and vice versa)
How does the Law of Supply explain why businesses want to produce more when prices increase?
-prices act as incentive for individuals to produce more or less goods with the market -the higher the prices, the more quantity producers are willing to supply (higher price=higher incentive to produce) -in order to maximize the profits of the business, the benefits>cost -when the prices decrease, there is less incentive to produce b/c the MC for each additional good exceeds the MB received (MC>MB)
changes in quantity supplied
-refer to movements along the given supply curve -Qs simply tracks the overall quantity supplied as a change in price occurs -the curve is already a summation of the quantity of goods supplied if the price changes -it tracks the quantity supplied and the price for those specific quantities under the constraints of cerebis parabis
supply
-refers to the decisions that we make as sellers; supply allows us to understand the production of goods of specific sellers and markets as the relate to specific price; higher prices=more production -tracks the amount producers are willing and able to sell at a given price
What is exactly are changes in expectations, as they pertain to the market? How does the market shift with these demands?
-shifts in expectations occur when individuals within the market (whole market) predict, assume, or know that there will be an increase or decrease in the prices in the future for specific goods -If the expectation is that the price for a product will increase in the future, the overall demand will increase today -if there is a decrease in price in the future, more people will buy less today and more in the future
What is a decrease in the total market? What does it look like?
-something has changed in the market (extenuating circumstances) that leads for an overall change within the market -shifts the overall demand curve to the left
individual demand
-the demand for a good or service by an individual consumer
What is the economic surplus?
-the economic surplus is the total benefits received from purchasing a good minus the total costs -the ES measures how much a purchase influences an individual's well being -According to the cost-benefit principle, we will continue to purchase something until the benefits < costs
Supply curve and its relation to the marginal cost
-the supply curve is also your marginal cost curve -keep selling until the MB=MC -according to RR of sellers, this is the equivalent keep selling/producing until the price=MC -if this is the case, the supply curve is also its MC cost -meaning producers are willing to produce more of a certain good if the price of the extra good produced exceeds to overall marginal costs for producing it -you should stop selling when the MC exceeds the Price
What are complement goods? And how do they affect the overall shift in the market?
-these are two or more goods that a closely related; these products are complementary of each other -when the price for one of these products increases, the demand for that other product begins to decrease -ex: the demand for pizza begins to decrease when the price Pepsi increases
market supply curve
-this is the graph the quantifies the overall goods of goods supplied in a specific market for a particular price -it tracks the total quantity supplied by all firms within that market for certain prices -market supply curve plots the total quantity of the entire market of all producers will supply at each specific price
What allows us to see if the overall market demand has change?
-we can recognize that there is a change in the total quantity demanded shifts at every possible price -when it shifts to the right, the overall demand for a good increases -when it shifts the left, the overall demand good for a curve decreases
Productivity/Technology and its impact on the overall supply demand of a market
-when business are able to figure out how to produce more due to newer technologies, the cost of production is much more cost efficient in terms of cost production and overall production. Ultimately, new technologies means the overall input costs for operating a business decreases which decreases the marginal costs for production/supply -As technology advances and productivity increases, production cost decreases, which causes firms to supply more at every price. E.g., if Exxon adopts new refinery processes that allow it to produce the same amount of gasoline with fewer workers or less crude oil, this will reduce its marginal costs (MC), shifting the supply curve to the right.
When is an economy inefficient?
-when the MC<MB -When the MC>MB
How do changes income effect the overall market demand?
-when the overall income increases there is greater incentive for individuals participate in the market -more income leads to a greater incentive to buy more goods at each and every cost; which shifts the overall market demand to the right -specifically, there are certain goods within the market whose overall quantity shifts when income rises: 1.) normal goods 2.) inferior goods
What are Price of related goods?
-when the price change of one good, it may affect the overall quantity of the other good being consumed within the market
What are the two forms of related goods?
1. substitute 2. complement goods
Prices of Inputs and there influence on the change of supply
A change in the price of an input—anything used in the production of a good or service—is the most likely factor to cause the supply curve for a product to shift. -Lower input prices will lead to lower marginal costs which in turn increase the quantity a business is willing to supply at any given price. Thus, this shifts the curve to the right -Higher input prices lead to higher marginal costs which in turn decrease the quantity a business is willing to supply at any given price
What are price floors?
A legal minimum on the price at which a good can be sold, price cannot fall below a level -these set prices are above the equilibrium price -when a price floor is sat above the eq. price, the QS>Qd which leads to a surplus
What are the purpose of price ceilings?
A price ceiling is a limit on the price of a good or service imposed by the government to protect consumers by ensuring that prices do not become prohibitively expensive. For the measure to be effective, the price set by the price ceiling must be below the natural equilibrium price
Consumer Surplus and its relation to marginal utility
Consumer surplus is linked to marginal utility - the additional satisfaction that the consumer receives from consuming an additional good or service. -When marginal utility falls to zero, it means that the consumer will no longer be willing to purchase the good or service. This is also at the point where there is no longer a consumer surplus
What is elastic demand?
Demand is elastic when a change in price causes a large change in demand -It will result in a low consumer surplus as customers are no longer willing to buy as much of the product or service with a change in price.
normal goods (superior goods)
Goods for which demand goes up when income is higher and for which demand goes down when income is lower.
Producer surplus practice problem(eq. quantity)
Let us take another example of a market where the Demand curve and Supply curve governed by (-0.0006x + 30) and (0.0006x + 15) where 'x' is the quantity of goods sold. Let us take the market situation a certain of the year. Calculate the producer surplus in the given market scenario.Let us take another example of a market where the Demand curve and Supply curve governed by (-0.0006x + 30) and (0.0006x + 15) where 'x' is the quantity of goods sold. Let us take the market situation a certain of the year. Calculate the producer surplus in the given market scenario. Given: -Minimum Price to Sell (OQ) = $15.00 (Zero Demand) Market Price (OP) = $22.50 (Equilibrium Price) Quantity Sold (PS) = 12,500 (Equilibrium Quantity) What is producer surplus? ½ * 12,500 * ($22.50 - $15.00)=$46,875
Producer surplus practice problem(total quantity)
Let us take the example of a producer who is a manufacturer of niche products used in the widgets. The manufacturing cost of the product adds up to around $150 per piece and so the producer is willing to sell the product at $180. However, due to a sudden spike in the demand for the widget, the demand for the niche product also surged resulting higher market price of $240. Calculate the producer surplus for the manufacturer if they sold 50,000 pieces during the year. -Producer Surplus = (Market Price - Minimum Price to Sell) * Quantity Sold Producer surplus=(240-150)*50000
What is market equilibrium?
Market equilibrium is the point at which the supply and demand curves intersect Market equilibrium is the price and quantity where the market will naturally go to.
Where is producer surplus on a graph?
The area below the price and above the supply curve
What causes equilibrium price to decrease?
The equilibrium price will fall if there is less demand and more supply.
Producer Surplus and its relation to Marginal costs
The price of a product unit along the supply curve is known as the marginal cost (MC). -A producer is more likely to produce more according to the Rational Rule for sellers when the MB>=MC of producing an extra good -using opportunity costs suppliers determine if producing extra units will bring them benefits or if there best alternative to receive benefits is from not producing more -When the producer surplus is positive and above zero, suppliers are willing to produce more b/c their overall benefits exceed the marginal cost of producing an extra good
What are subsidies?
a sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive.
supply schedule/curve
a table of curve that illustrates the relationship that a seller is willing to produce specific goods for specific prices -it is the relationship of the price of specific goods and the quantity supplied at that specific good
demand schedule/curve
a table/curve that shows the relationship between the price of a product and the quantity of the product demanded throughout the market
Where is consumer surplus on a graph?
above price and below demand curve
Efficient Allocation
allocating goods to create the largest economic surplus, which requires that each good goes to the person who'll get the highest marginal benefit from it -this is the point where goods and distributed in a manner that produces optimal marginal benefits and economic surplus for both the buyer and the seller -the point where the demand curve (marginal utility) is equal to the marginal costs (supply curve)
What are substitutes in production? How do they affect the supply curve?
allows a business to have alternative uses of its resources by manufacturing other products using the same inputs. -ex: the price of diesel fuel rises enough, it will be more profitable for Exxon to produce diesel than to produce gasoline. This will lead Exxon to switch some production from gasoline to diesel, shifting its gasoline supply curve to the left. Due to a decline in demand and popularity, Ford Motor Company is planning to phase out traditional sedans such as 'Fusion' and 'Taurus' to focus on SUVs and trucks, shifting its SUV/truck supply curve to the RIGHT. Ford's sedans and trucks/SUVs are substitutes-in-production.
What causes equilibrium price to increase?
an increase in demand or a decrease in supply
What is inelastic demand? How does it affect buyers? How does it affect sellers?
an increase or decrease in price will not significantly affect demand for the product -Demand curves are usually downward sloping because the demand for a product is usually affected by its price. With inelastic demand, consumer surplus is high because the demand is not affected by a change in the price, and consumers are willing to pay more for a product. -sellers will increase their prices to convert the consumer surplus to a producer surplus
The law of demand states that
as other things remain equal, as the price for a good or service falls, the quantity demanded increases; there is more incentive to buy something for a lower price -prices act as obstacles to buyers
Consumer demand example problem(eq. quantity demanded
doughnuts on sale for $3. In turn, 1,000 are sold at that price. The maximum any one consumer would pay is $6. This willingness to pay starts to decline along the demand curve until it reaches supply. What is the total consumer supply? Equation: The amount they are willing to pay-the amount they pay In this case 1000 units are sold WTP: $6 Amount paid: $3 Consumer supply: 1/2 *Quantity(1000 units) *(WTP-Amount Paid) (6-3) =$1,500
Inferior goods are
goods whose demand varies inversely w/ income. (ex:buying publix brand macaroni instead of kraft)
When is an economy efficient?
if there is no opportunity to make someone better off without making anyone else worse off -when the MC=MB
individual supply curve
illustrates the relationship between quantity supplied and price for an individual producer
What is the individual demand curve
illustrates the relationship between the overall quantity demanded and the price demanded by the individual consumer; it is the amount of quantity demanded by the consumer at each specific price
What happens at the equilibrium price when the demand of a good increase?
the increase of demand will shift the demand curve to the right creating a new equilibrium price -The demand increase, leads to a greater Qs and Price
What happens to the equilibrium price when the supply decreases?
the overall Q decrease and the price increases there is a decrease in supply of goods and services while demand remains the same, prices tend to rise to a higher equilibrium price and a lower quantity of goods and services. -seen in Graph D
What happens to the equilibrium price when the supply increases? the overall Q increases and the price decreases
the overall Q increases and the equilibrium price price decreases -There is an inverse relationship between the supply and prices of goods and services when demand is unchanged. If there is an increase in supply for goods and services while demand remains the same, prices tend to fall to a lower equilibrium price and a higher equilibrium quantity of goods and services. seen in graph C
What is equilibrium price?
the price at which buyers and sellers agree to trade when the total supply of goods matches the total demand of goods -occurs when the price at which the quantity demanded equals the quantity supplied -the market experiences a moment of consolidation or sideway momentum, market experiences a moment of equilibrium
What is the law of diminishing marginal utility
the principle that explains that consumers receive less satisfaction or less marginal benefits when they buy more of a product -this is one of the reasons why the demand curve slopes downward b/c individuals receive less marginal benefit when they purchase more of a good -the demand curve slope downwards because there is a decrease in the marginal benefit from consuming more of goods; every additional unit yields a smaller MB ex: buying more ice cream: the more you buy the fewer benefits that you get, the more ice cream=the less satisfied and more sick a person will become
According to the law of demand, what happens when prices go down?
the quantity demanded increases
What is the equilibrium quantity?
this is the point where the overall amount demanded by the market equals the amount supplied. -At this point, the demand and the supply curve intersect each other. -The price prevailing at this point is the eq. price -summary: quantity demanded=the quantity supplied
Law of Supply
under the constraints of cerebis parabis, as the prices of a good increases, the overall quantity supplied also increases -in other words, a seller wants to sell at a higher price than at a lower one