Chapter 4 - Equilibrium

Factors that shift demand curves:

1. Income increases demand for normal goods and decreases demand for inferior goods 2. Preferences including advertising and social pressure 3. Prices of complements and substitutes 4. Expectations 5. Congestion and network effects 6. The type and number of buyers . . . but not a change in price.

Factors that shift supply curves:

1. Input prices 2. Productivity and technology 3. Other opportunities and the prices of related outputs 4. Expectations 5. The type and number of sellers . . . but not a change in price.

How can you tell whether a market is in a supply-equals-demand equilibrium?

A simple diagnostic is to check whether prices are changing. Whenever the price is rising, that's a sign that at the current price, the quantity demanded exceeds the quantity supplied. And if the price is falling, it's likely that the quantity supplied exceeds the quantity demanded. If prices are free to adjust, then eventually these markets will be drawn to their equilibrium.

Increase in demand

Any change that leads people to buy a larger quantity at each price is an increase in demand, - shifting the demand curve to the right. increase in demand -> right shift: increase in price, and increase in quantity

Surpluses lead the price to :

FALL a surplus leads to discounts, which push the price down

shifts in the demand curve

a change in one of the variables, other than the price of the good itself, that affects the willingness of consumers to buy

Shortages lead the price to :

RISE a shortage leads to mark ups, which push the price up

Interpreting market data

Rule one: If prices and quantities move in the same direction, then the demand curve has definitely shifted. (It's possible that the supply curve may also have shifted.) Rule two: If prices and quantities move in opposite directions, then the supply curve has definitely shifted. (It's possible that the demand curve may also have shifted.)

Predicting Market Outcomes you can predict how markets will respond to changing economic conditions

Step one: Is the supply or demand curve shifting (or both)? Remember that any change affecting buyers or their marginal benefits will shift the demand curve, while any change affecting sellers or their marginal costs will shift the supply curve. Step two: Is that shift an increase, shifting the curve to the right? Or is it a decrease, shifting the curve to the left? An increase in marginal benefit is an increase in demand, while an increase in marginal cost creates a decrease in supply. Step three: How will prices and quantities change in the new equilibrium? Compare the old equilibrium with the new equilibrium.

Equilibrium

a stable situation with no tendency to change (no shortage or surplus in equilibrium)

Decrease in demand

any change that leads people to buy a smaller quantity at each price, it's a decrease in demand, - shifting the demand curve to the left. decrease in demand -> left shift: decrease in price, and decrease in quantity

Equilibrium occurs when

at the point where the quantity demanded is equal to the quantity supplied, and this occurs where the curves cross

Perfect competition

many buyers and many sellers of an identical good, and each of these buyers is small relative to the whole market.

movements along the supply curve:

occur when businesses change their quantity supplied in response to a change in price.

shifts in the supply curve cause

price and quantity to move in opposite directions increase in supply -> right shift: decrease in price, and increase in quantity decrease in supply -> left shift: increase in price, and decrease in quantity

shifts in the demand curve cause

price and quantity to move in the same direction increase in demand -> right shift: increase in price, and increase in quantity decrease in demand -> left shift: decrease in price, and decrease in quantity

Shortage

quantity demanded exceeds quantity supplied - @ any price lower than the equilibrium price

Surplus

quantity supplied exceeds the quantity demanded - @ any price higher than the equilibrium price

movement along the demand curve

the change in quantity demanded brought about by a change in price - Again, don't confuse these shifts in the demand curve with a movement along the demand curve due to a change in price, which leads to a change in the quantity demanded.

Equilibrium Price

the price at which the quantity demanded equals the quantity supplied QS = QD

Equilibrium quantity

the quantity supplied and the quantity demanded at the equilibrium price QS = QD

Market Equilibrium

when the quantity supplied is equal to the quantity demanded - determined in equal measure by both supply and demand