Chapter 3- Demand, Supply, and Market Equilibrium

market equilibrium

-occurs when there are no shortages or surpluses -situation in which the opposing forces of supply and demand equal each other -demand intersects supply -qs=qd

Determinants of Supply

1. Costs of production a. prices of the factors of production b. Business taxes c. business subsidies received Supply shifts to the left when cost increases These factors are assumed constant when thinking of the law of supply (ceteris paribus) 2. Prices of other goods produced by the seller Substitues in production complements in production (not needed for chapter 3 test) 3. New technologies and productivity ex: technological advance, increase in labor productivity, which leads to a decrease in per unit in production cost. 4. Expectation of sellers Expect increase of price, decreases supply, Expect decrease price, increase in supply. 5. Number of sellers more companies in the industry, increase in supply

price cieling

1. the maximum legal price a seller may charge for a good 2. must be set below the equilibrium price to be an effective price ceiling 3. creates a permanent shortage

price floor

1. the minimum legal price a seller may charge for a good 2. must be set above the equilibrium to be an effective price floor 3. creates a permanent surplus

Determinants of demand

Income of buyers a. normal good income and demand are DIRECTLY related b. inferior good income and demand are INVERSELY related, ceteris paribus Prices of other goods purchased by the buyer a. substitute goods goods used in place of each other b. complementary goods goods used together c. independent goofs goods that are not related Preference of buyers Expectation of buyers (!!!) Number of buyers

!!

When one side of the graph shifts, the other is unaffected. EX: when the demand curve shifts, it shifts only the demand curve.

Why is the d-curve downward sloping?

a higher price will REDUCE the quantity demanded because of the 1.) substitution effect 2.) Income effect

free market price

a market clearing price, when something has value

rationing mechanism

a system for choosing who gets how many goods during a shortage. Long lines are often used to ration goods in shortage (so the good is distributed on a first-come, first-serve basis).

non-price rationing mechanisms

arise to circumvent the imbalance in a market due to the shortage created by a government imposed price ceiling a. first come first serve b. favoritism (donald trump vs. harold van boven- whos gonna get the kidney?) c. rationing coupon d. force (stealing, crime)

supply increase; demand increase.

complex cases of changes in supply, demand, and equilibrium: a supply increase drops equilibrium price, while and increase in demand boosts it. If the increase in supply is greater than the increase in demand, the equilibrium price will fall. If the opposite holds, the equilibrium price will rise. The effect on equilibrium quantity is certain: the increases in supply and demand both raise the equilibrium quantity. Therefore, the equilibrium quantity will increase by an amount greater that caused by either change alone.

supply decrease; demand decrease

complex cases of changes in supply, demand, and equilibrium: if the decrease in supply is greater than the decrease in demand, equilibrium price will rise. If the reverse is true, equilibrium price will fall. Because the decrease sin supply and demand each reduce equilibrium quantity, we can be sure that equilibrium quantity will fall.

supply increase; demand decrease

complex cases of changes in supply, demand, and equilibrium: what effect will a supply increase and a demand decrease for some good have on equilibrium price? both changes decrease price, so the net result is a price drop greater than that resulting from either change alone. What about equilibrium quantity? here the effect off the changes in supply and demand are opposed: the increase in supply increases equilibrium quantity, but the decrease in demand reduces it. `

supply decrease; demand increase

complex cases of changes in supply, demand, and equilibrium: a decrease in supply and an increase in demand for some good both increase price. their combined effect is an increase in equilibrium price greater than that caused by either change separately. the effect on the equilibrium quantity is indeterminate, depending on the relative sizes of the changes in supply and demand.

causes of a shortage

demand exceeds what is produced. if the actual market price is below P(e)

market system; efficient

given certain conditions, the _________ ___________ promotes an ___________ allocation of resources

Independent Good

goods that are not related Ex: toothpaste and mayonnaise (or at least I hope.. gross.) As the price of toothpaste increases, the demand for mayonnaise is unaffected.

substitute goods

goods used in place f each other. The price of good W and the demand for good X are directly related, ceteris paribus. EX: Haagan Daaz and Ben & Jerry's. Haagan Daaz increases their price from 2.95 to 3.95, the quantity demanded for the equivalent counterpart, B&J, which is still priced at 2.95, increases.

complementary goods

goods used together The price of good Y and the demand for good Z are INVERSELY related, ceteris paribus. Ex: Veggie burgers and burger buns As the price of veggie burgers increases, the quantity demanded for veggie burgers decreases. Therefore, the quantity demanded for the complementary item, veggie burger buns, also increases.

government set prices or price controls

government sets price to help the people or the corporations. can cause a shortage or a surplus 1. interfere with the rationing function of competitive prices 2. are an obstacle to achieving an efficient allocation of recourses 3. can cause undesirable side effects

normal good

income and demand are DIRECTLY related ex: steak is a normal good. as the income of consumers increases, the demand for steak also increases. "normal" = relative term!

inferior good

income and demand are INVERSELY related, ceteris paribus ex: Trippe (Intestines) is an inferior good. As the income of consumers increases, the demand for Trippe decreases, mostly because the consumers' income is going toward the normal good, (i.e, steak.) If the income of consumers were to decrease, they may head for the less expensive and popular Trippe, and the demand would increase. "inferior"= RELATIVE TERM

the _______ and _______________ effects combine to increase a consumers willingness and ability to buy more of a product when its price falls, ceteris paribus, and vice versa.

income and substitution

indicate whether the following change in economic circumstance, ceteris paribus, will increase (shift rightward), decrease (shift leftward) or have no effect on the demand of the product X: buyers expected the price of X to rise in the near future

increase

indicate whether the following change in economic circumstance, ceteris paribus, will increase (shift rightward), decrease (shift leftward) or have no effect on the demand of the product X: decrease in the price of Z, products X and Z are complements

increase

indicate whether the following change in economic circumstance, ceteris paribus, will increase (shift rightward), decrease (shift leftward) or have no effect on the demand of the product X: increase un the price of Y, products X and Y are substitutes

increase

indicate whether the following change in economic circumstance, ceteris paribus, will increase (shift rightward), decrease (shift leftward) or have no effect on the demand of the product X: increases in income, assume product X is a normal good

increase

indicate whether the following change in economic circumstance, ceteris paribus, will increase (shift rightward), decrease (shift leftward) or have no effect on the supply of the product: increase in the number of firms producing product x

increase

indicate whether the following change in economic circumstance, ceteris paribus, will increase (shift rightward), decrease (shift leftward) or have no effect on the supply of the product: decrease in the wage rate paid to workers producing product x

increase

indicate whether the following change in economic circumstance, ceteris paribus, will increase (shift rightward), decrease (shift leftward) or have no effect on the supply of the product: technological advances in productivity

increase

allocative efficiency

means pro ducting the particular mix of goods and services most highly valued by society (minimum cost production assumed)

productive efficiency

means the production of and particular good using the best technology in the least costly way

market

mechanism/process that brings buyers and sellers, who are essential to a market, together to establish the price of an item and how much is bought.

increase in the price of x

no effect

indicate whether the following change in economic circumstance, ceteris paribus, will increase (shift rightward), decrease (shift leftward) or have no effect on the demand of the product X: decrease in the price of X

no effect as price falls, QUANTITY DEMANDED AND ONLY QUANTITY DEMANDED , NOT THE DEMAND! demand determinants are the only ones who SHIFT the curve. price is not a determinant of demand! increase in demand comes from the determinants!!

indicate whether the following change in economic circumstance, ceteris paribus, will increase (shift rightward), decrease (shift leftward) or have no effect on the supply of the product: increase in the number of people buying product z

no effect number of buyers shift demand and only demand!

Qd>Qs

occurs when there is excess demand- shortage

Qs>Qd

occurs when there is excess supply- surplus

in a competitive market the rationing mechanism that brings the opposing forces of supply and demand into balance is

price

in a competitive market, the rationing mechanism that brings the opposing forces of supply and demand into balance is

price

the market for a product is in equilibrium when there is no tendency for ______ to change

price

the most important variable that influences a buyers decision to buy is

price

the most important variable that influences a seller's decision to sell is

price

elimination of a surplus

producers set prices at something buyers are willing to pay, and finds new equilibrium.

law of supply

put yourself in the shoes of a company. Price and quantity supplied are DIRECTLY (positively) related, ceteris paribus. Price goes up, QS is going to increase!! Price goes down QS is going to decrease!! For a given quantity, the supply curve shows the minimum price that sellers are willing to accept for that quantity. For a given price, the supply curve shows the quantity sellers are willing and able to sell at that price.

rationing function of a price

refers to the ability of the competitive forces of supply and demand to establish a price at which selling and buying decisions are consistent. i.e, where Qd=Qs when market rebalances itself after a temporary surplus or shortage

demand

relationship between price and the quantity buyers are willing and able to buy at each price which might exist during a given time period.

supply

relationship between profit price and the quantity sellers are willing and able to sell at each price which might exist during a given period of time. Resources are very important. AS WITH DEMAND AND QUANTITY DEMANDED, SUPPLY, ITSELD, IS A VERY GERNAL CONCEPT THAT SHOWS ALL OF THE SUPPLY THAT IS SUPPLIED AT A TIME.

income effect

states that when the price of X falls, the purchasing power of money income goes up. LOGIC!!! The actual income of the consumer does not increase, only the purchasing power does. For example, if the price of beef decreases, and now you can buy 2 dollars per pound instead of 4, you'll have the means to buy more, due to purchasing power and the INCOME EFFECT!!!

substitution effect

states that when the price of X falls, the quantity demanded goes up. the economic understanding that as prices rise — or income decreases — consumers will replace more expensive items with less costly alternatives. "relatively cheaper"

law of demand

stets the price and quantity demanded are inversely (or negatively) related, assuming all other influences on buyers' planned purchases remain the same. (ceteris paribus)

causes of a surplus

supply exceeds what is demanded. if the actual market price is above P(e)

ceteris paribus

the assumption that all variables except those under immediate consideration are held constant for a particular analysis.

equilibrium quantity

the quantity at which the intentions of the buyers and the intentions off the sellers match quantity demanded equals quantity supplied

legal price

what a good can legally sell for

disequilibrium

when a market is not in equilibrium it is always possible to identify mutually beneficial trades between buyers and sellers

equilibrium price

where the price and the intention of buyers and sellers match. quantity demanded equals quantity supplied