Microeconomics Chapter 4

Excess Supply AKA Surplus

When at the existing price, quantity supplied exceeds the quantity demanded.

Consumer Surplus:

measures the difference between the equilibrium price and the price consumers are willing and able to pay.

Inelastic demand:

occurs when buyer demand is not very sensitive to price changes.

Rent control is an example of:

price ceiling

Ceteris Paribus

"other things being equal" (no other relevant economic factors are changing) - economists rely on this assumption when making demand or supply curves

4 Step Process to Finding the Equilibrium Price and Quantity

1. Sketch the supply and demand curve before the economic change occurred 2. Decide whether the economic change affects demand or supply 3. Decide whether that change moved the curve(s) left or right, sketch the new curves 4. Compare original Equilibrium Price and Quantity to the new one.

Changes in Prices for Inputs of Production will move supply curves:

A higher price for key inputs (like gas for a delivery service) will cause supply to shift to the left.

Price Floor

A law that prevents a price from falling below a certain level.

Price Ceiling

A law that prevents a price from rising above a certain level.

Demand Curve

A line that shows the relationship between price and quantity demanded of a certain good or service on the graph, with quantity on the horizontal axis and the price on the vertical axis.

Supply Curve

A line that shows the relationship between price and quantity supplied on a graph, with quantity supplied on the horizontal axis and price on the vertical axis.

Supply

A relationship between price and quantity supplied of a certain good or service.

Demand

A relationship between price and the quantity demanded of a certain good or service.

Demand Schedule

A table that shows a range of prices for a certain good or service and the quantity demanded at each price.

Supply Schedule

A table that shows a range of prices for a good or service and the quantity supplied at each price.

New technologies for production can move the supply curve:

A technological improvement that reduces costs of production will shift supply to the right, so that a greater quantity will be produced at any given price.

Excess Demand AKA Shortage

At the existing price, the quantity demanded exceeds the quantity supplied.

Responses to Price Control

Black market, side payments, quality adjustment, shift in who is involved in the transaction

Factors that Shift Demand Curves:

Changes in income, population, taste, expectations, prices of closely related goods

Factors that Shift Supply Curves

Changes in natural conditions, altered prices for inputs of production, new technologies for production, and government policies that affect production costs.

Changes in natural conditions will move supply curves:

Ex) a drought decreases the supply of agricultural products, which means that at any given price, a lower quantity will be supplied (shift to the left)

Change in Income will move demand curves:

Ex) a household with a higher income level will tend to demand a greater quantity of goods at every price than a household with a lower income level. - the exception is with inferior goods

Changes in population will move the demand curve:

Ex) a society with relatively more children will demand more tricycles and day-care facilities

Complements

Goods that are often used together, so that a rise in the price of one good tends to decrease the quantity consumed of the other good, and vice versa.

Substitutes

Goods that can replace each other to some extent, so that a rise in the price of one good leads to a lower quantity consumed of another good, and vice versa

Inferior Goods

Goods where the quantity demanded falls as income rises.

Normal Goods

Goods where the quantity demanded rises as income rises.

Price Controls

Government laws to regulate prices.

Changes in expectations will move the demand curve:

If there is a chance of snow in North Carolina, demand for milk and bread will increase exponentially.

Inefficiency of Price Floors and Price Ceilings

Price controls prevent a market from adjusting to its equilibrium price and quantity = inefficient. However, they also transfer some consumer surplus to producers or some producer surplus to consumers.

Government policies will move the supply curve:

Taxes, regulations, and subsidies

Consumer Surplus

The benefit consumers receive from buying a good or service, measured by what the individuals would have been willing to pay minus the amount they actually paid. (Graph: the area between the market price and the segment of the demand curve above equilibrium)

Producer surplus

The 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. (Graph: the area between the market price and the segment of the supply curve below equilibrium)

Equilibrium

The combination of price and quantity where there is no economic pressure from surpluses or shortages that would cause price of quantity to shift.

Law of Supply

The common relationship that a higher price is associated with a greater quantity supplied.

Law of Demand

The common relationship that a higher price leads to a lower quantity demanded of a certain good or service.

Deadweight Loss

The loss in social surplus that occurs when a market produces an inefficient quantity

Equilibrium Price

The price where quantity demanded is equal to quantity supplied.

Equilibrium Quantity

The quantity at which quantity demanded and quantity supplied are equal at a certain price.

Social Surplus

The sum of consumer and producer surplus. Largest at equilibrium quantity and price than at any other quantity.

Quantity demanded

The total number of units of a good or service purchased at a certain price. A rise in the price almost always decreases the quantity demanded while a fall in price with increase the quantity demanded.

Quantity Supplied

The total number of units of a good or service sold at a certain price.

Shift in Demand

When a change in some economic factor related to demand causes a different quantity to be demanded at every price.

Shift in Supply

When a change in some economic factor related to supply causes a different quantity to be supplied at every price.

Changes in taste will move the demand curve:

Whether people want CDs or vinyl, chicken or steak

On the graph, consumer surplus is _______ producer surplus.

above

At the efficient level of output, it is impossible to increase consumer surplus without:

reducing producer surplus.

Objectification

refers to the fear that putting a certain price on certain things and buying or selling them might move them into a class of impersonal objects.

The demand curve:

shows the maximum price that consumers are willing and able to pay for each quantity.

Nearly all demand curves:

slope down from left to right (embody the law of demand: as price goes up, quantity demanded goes down)

Nearly all supply curves:

slope up from left to right (law of supply: as the price rises, the quantity supplied increases)

The supply curve in the very short run (or immediate term) is _______. (Hint: it represents a fixed supply)

vertical