Economics chapter 4

Supply Table

chart showing the behavior of producers in the market place.

When the demand curve shifts left

decrease in demand

The demand curve is

downward-sloping line that graphically shows the quantities demanded at each possible price

Shifts in either supply or demand change

equilibrium price

If there is an excess demand (a shortage)

quantity demanded is greater than quantity supplied

excess demand (shortage)

quantity demanded is greater than quantity supplied

As price increases

quantity supplied increases

If there is an excess supply (a surplus)

quantity supplied is greater than quantity demanded

excess supply (surplus)

quantity supplied is greater than quantity demanded

quantity demanded

refers to a specific amount that will be demanded per unit of time at a specific price, other things constant

quantity supplied

refers to a specific amount that will be supplied per unit of time at a specific price, other things constant

equilibrium quantity

the amount bought and sold at the equilibrium price

price adjusts

when quantity demanded is greater than quantity supplied, prices tend to rise; when quantity supplied is greater than quantity demanded, prices tend to fall

the law of supply is based on two phenomena

1. at higher prices, existing suppliers supply more 2. at higher prices, new suppliers enter the market

Limitations of supply/demand analysis

- Sometimes supply in demand are interconnected - The other things held constant assumption is not likely to hold when the goods represent a large percentage of the entire economy - The fallacy of composition is the false assumption that what is true for a part will also be true for the whole

An increase in demand or a decrease in supply

-Creates excess demand at the original equilibrium price -Excess demand increases price until a new higher equilibrium price is reached

The law of supply occurs because:

-When prices rise, firms substitute production of one good for another -Assuming firm's costs are constant, a higher price means higher profit

6 things to remember about a demand curve

1. A demand curve follows the law of demand: When prices rise, quantity demanded falls and vice versa 2. The horizontal axis-quantity-has a time dimension. 3. The quality of each unit is the same. 4. The vertical axis-price-assumes all other prices remain the same 5. The demand curve assumes everything else is held constant. 6. Effects of price changes are shown by movements along the demand curve. Effects of anything else or demand (shift factors) are shown by ships of the entire demand curve.

What equilibrium isn't

1. A state of the world 2. Inherently good or bad

For the market, the law of demand is based on two phenomena

1. At lower prices, existing demanders find more. 2. At lower prices, new demanders enter the market.

What equilibrium is

1. It is a characteristic of the model the framework you use to look at the world 2. A state in which dynamic pressures offset each other

Shift factors of supply are similar to those for demand

1. Prices of inputs. 2. Technology. 3. Expectations. 4. Taxes and subsidies.

Important shift factors of demand

1. Society's income 2. The prices of other goods 3. Tastes 4. Expectations 5. Taxes and subsidies

Upward pressure on price

1. an impending nuclear holocaust causes people to stock up on Twinkie's, a popular cake snake provided by many companies 2. "The Lion King" at the Disney store has 9 million orders for the DVD when the store in fact, only has 1 million copies. They told the public there would be 9 million copies 3. the flu vaccine was found to be contaminated and consequently recalled during fall and winter months

Change in anything other than price

Affects the demand curve changes the entire demand curve

Why does the demand curve slope downward?

Because prices and quantity demands are inversely related. As the price of a good rises, people switch to purchase other goods whose prices have not risen by as much.

A decrease in demand or an increase in supply

Creates excess supply at the original equilibrium price Excess supply decreases price until a new lower equilibrium price is reached

A change in the entire demand curve is a shift in

Demand

In the early 2000s car sales in China had slowed in part caused by the government's actions to limit businesses from lending funds to consumers. Assuming that car market in China can be analyzed with demand and supply curves, what's the best reflects the change in the market?

Demand curve shifts to the left with no change in supply

The uncertainty caused by the terrorist attacks of September 11, 2001, made customers reluctant to spend on luxury items. This reduced ________.

Demand for luxury goods. The other possibility, quantity of luxury of goods demanded, is used to refer to the movement along the demand curve

When quantity supplied equals quantity demanded, prices have a tendency to change

Equilibrium

When the demand curve shifts to the right

Equilibrium price and quantity will both increase

When the supply curve shifts right

Equilibrium prices decline and equilibrium quantity rises

In the free market, the forces of supply and demand interact to determine

Equilibrium quantity and equilibrium price

If market supply increases, equilibrium prices will

Fall, causing a movement along the demand curve

demand tells us

How much will be bought at various prices

Newton's Laws of Motion

INCLUDES 3 LAWS. 1. AN OBJECT AT REST WILL REMAIN AT REST UNLESS ACTED UPON BY AN (UNBALANCED) FORCE, AND AN OBJECT IN MOTION WILL CONTINUE TO STAY IN MOTION WITH THE SAME SPEED AND IN THE SAME DIRECTION UNLESS ACTED UPON BY AN (UNBALANCED) OUTSIDE FORCE. (THIS LAW IS ALSO CALLED "INERTIA") 2. ACCELERATION IS PRODUCED WHEN A FORCE ACTS ON MASS AND THE GREATER THE MASS OF THE OBJECT BEING ACCELERATED, THE GREATER THE AMOUNT OF FORCE NEEDED TO ACCELERATE THAT OBJECT. 3. FOR EVERY ACTION, THERE IS AN EQUAL AND OPPOSITE REACTION.

To derive a market demand curve from individual demand curves, it would be necessary to:

Sum the curves horozontially, adding quantities demanded to each price

Tuition and fees for four year colleges in the United States has risen over 5% per year in the recent past. One cause for the increase in price has been an increase in demand for college education. In the standard model, what could be a possible explanation for the increase in demand for college education?

Income in the United States has risen

Shift factors of demand include

Income, prices of other goods, taste, expectations, and taxes on subsidies to customers

A market demand curve is the horizontal sum of all

Individual demand curves

The law of supply in demand holds true because

Individuals can substitute

Equilibrium

Is a concept in which opposing dynamic forces cancel each other out

demand curve

Is a graphic representation of the relationship between price and quantity demanded

supply curve

Is the graphic representation of the relationship between price and quantity supplied

market supply curve

Is the horizontal sum of all individual supply curved

The quantity of a good demanded is inversely related to the goods price

Law of demand

downward pressure on price

Movements along the demand and supply curves; increase in quantity demanded; decrease in quantity supplied

Explain how the law of the man and the law of supply interact to bring about equilibrium

Other than price are called shiftfactors. Shift factors of the supply include income, prices of other goods, tastes, expectations, and taxes on and subsidies to customers

Existing firms conspire to limit a new competition by lobbying Congress to

Pass restrictive regulations and by devising pricing strategies to scare off new entrants

As prices change

People change how much they're willing to buy

When prices of a good rises

People substitute a way from a good 2 other goods

Quantity supplied raises as

Price rises

when quantity supplied is greater than quantity demanded

Prices tend to fall

when quantity demanded is greater than quantity supplied

Prices tend to rise

State the law of demand

Quantity demanded rises as price falls, other things constant. Quantity demanded falls as price rises, other things constant.

When supply shifts right and demand shifts right

Quantity increases Price increases OR decreases

What is not consistent with the law of supply

Quantity supplied of a good is inversely related to the good price

State the law of supply

Quantity supplied rises as price increases, other things constant. Quantity supplied falls as price decreases, other things constant.

supply

Refers to a schedule of quantities of a good a seller is willing to sell per unit of time at various prices, other things constant

demand

Refers to a schedule of quantities of a good that will be bought per unit of time at various prices, other things constant

The law of supply states

That the quantity of a good supplied is directly related to the goods price

movement along the demand curve

The graphical representation of the effect of a change in price on the quantity demanded

Shift factors of supply include

The price of inputs, technology, expectations, and taxes one subsidies to producers

equilibrium price

The price toward which the invisible hand drives the market

Supply of Labor

The relationship between the quantity of labor supplied and the real wage rate when all other influences on work plans remain the same.

Supply curve represents

The set of minimum prices in individual seller will accept for various quantities of goods

If social and political forces were included in the analysis

They'd provide a counter- pressure to the dynamic forces of supply and demand

The use of the phrase "other things constant" in supply and demand analysis indicates that

We are considering changes in just one factor

Interaction of supply and demand

What determines the price and the quantity produced of most goods?

In the real world, you must add political and social forces to supply/demand model.

When you do equilibrium is likely not going to be where quantity demand equals quantity supplied

change in demand

a shift of the demand curve, which changes the quantity demanded at any given price

Demand Table

a table that shows the relationship between the price of a good and the quantity demanded

Prices adjust

and tend to rise when there is excess demand and fall when there is excess supply to reach an equilibrium

A demand shift to the right generally leads to

higher prices and higher output

time dimension

identifies the point or points in time at which we would like to measure our variable

change in quantity demanded

movement along the demand curve showing that a different quantity is purchased in response to a change in price

Quantity supplied falls as

price falls

As price increases

quantity demanded decreases

fallacy of composition

the false assumption that what is true for a part will also be true for the whole

shift in demand

the graphical representation of the effect of anything other than price on demand

market demand curve

the horizontal sum of all individual demand curves

The supply curve is

upward-sloping line that graphically shows the quantities supplied at each possible price