Micro-economics Chapter 4

Surplus

excess in supply of a good.

Unexploited Gains from Trade (DWL)

exist when quantity is below the equilibrium quantity.

An increase in demand means:

is a shift of the entire demand curve (up and to the right). This works the same way with supply.

Equilibrium price

is stable no matter the price because the price of quantity demanded is exactly equal to the quantity supplied.

Wasteful Trades (DWL)

quantities that are greater than the equilibrium quantity.

Things that happen in a free market maximizing the gains of trade:

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 unexplored gains from trade and no wasteful trades.

Remember:

A free market maximizes producer plus consumer surplus.

Remember:

A free market maximizes the gains from trade.

Remember:

Competition will push prices down whenever there is a surplus.

Remember:

Competition will push prices up whenever there is a shortage.

An increase in demand results in:

Higher equilibrium quantity

Things to take away from Chapter 4:

Market competition brings about an equilibrium in which the quantity supplied is equal to the quantity demanded. Only one price/quantity combination is a market equilibrium and you should be able to identify this equilibrium in a diagram. You should understand and be able to explain the incentives that enforce the market equilibrium. What happens when the price is above the equilibrium price? Why? What happens when the price is below the equilibrium price? Why? The sum of consumer and producer surplus (the gains from trade) is maximized at the equilibrium price and quantity, and no other price/quantity combination maximizes consumer plus producer surplus. You should know from Chapter 3 the major factors that shift demand and supply curves and from this chapter be able to explain and predict the effect of any such shift on the equilibrium price and quantity. A "change in demand [the demand curve]" is not the same thing as "a change in quantity demanded"; a "change in supply [the supply curve]" is not the same thing as "a change in quantity supplied."

What would happen if the demand for oil increased?

Quantity supplied would increase.

An increase in Quantity demanded means:

The movement along a fixed demand curve. This works the same way with supply.