Macro ECON Chapter 3

The Price System

Prices send signals in free market economies: Buyers - what to buy? How much? Sellers - What to sell? How much? Method? Prices are adjusted; Someone is deciding the prices - What do consumers want? Popularity contributes to price. Sell direct or through distributor or contract Stores decide to put things on sale when people are not buying a product

Determinants of Supply: Nonprice Factors

Production Technology Costs of Resources Prices of Other Commodities Expectations Number of Sellers Taxes and Subsidies

Law of Supply

Price and quantity supplied are positively related. As prices rise, providers want to sell more to maximize profits Ex: As ethanol demand pushes the price of corn higher, production of corn increases

Determinants of Demand: Nonprice factors 2) Price of Substitutes

Price increase of Good A will increase demand for Good B (Two different brands of similar products)

What happens to demand for houses if more people believe the market has bottomed out?

The demand increases because people believe they can find houses for really cheap prices

What happens to the equilibrium price and quantity of inferior goods when incomes fall?

The equilibrium price will increase because the demand for inferior goods increases because consumers income has fallen

Memory chips, a key component in portable hard drives, have fallen in price. What happens to the supply of portable hard drives? A) Supply does not change B) Supply shifts to the right C) Supply shifts to the left D) Supply initially shifts to the right and then to the left

B) Supply shifts to the right Cost of the production decreases, supply increases

As airlines increase the number of premium seats for sale (all else equal), what happens to equilibrium price and quantity for premium seat tickets? A) Price increases, Quantity Increases B) Price decreases, Quantity Increases C) Price increases, Quantity decreases D) Price decreases, Quantity decreases

B) Price decreases, Quantity Increases Supply shifts out and quantity increases, price decreases - Creating new levels/sections for differentiation of products to appeal to different tastes and preferences - Cheaper seats that aren't reserved and no luggage

Zika virus and travel

**people are buying more travel insurance - want to make sure they can cancel if they need to This company was at the right place at the right time

Alfred Marshall

1842-1924 Father of modern supply/demand analysis Noted that supply and demand go together like the blades of a scissors that cross at equilibrium

Determinants of Demand: Nonprice factors 5) Expectations

A change in consumers' expectations about: - future prices - goods' availability - their own incomes Quantify expectations once you see people actually buying the product. How much should the company buy and stock - was that amount correct, look at history

Determinants of Supply: Nonprice Factors 6) Taxes and Subsidies

Affect costs and therefore supply A 10% yacht tax reduced the supply of yachts Subsidy = decrease in price of the product Effect: when subsidies on solar and wind energy expire, supply decreases (Subsidy expires = supply decreases (because price goes back up))

Determinants of Supply: Nonprice Factors 4) Expectations

An expectation of a future rise in prices decreases supply now If the price of gold is expected to rise in the future, people hold on to their gold now, restricting supply Cyclical - price expected to rise, people hold on to their product, reducing supply, which makes the price go up...

Demand shifts and Market Equilibrium

An increase in demand causes the equilibrium to change to a higher price and quantity (and vice versa)

Supply shifts and Market Equilibrium

An increase in supply causes the equilibrium to change to a lower price and quantity (and vice versa)

Determinants of Supply: Nonprice Factors 3) Prices of Other Goods and Commodities

An increase in the profitability of electric cars will decrease the supply of gas cars

Markets

An institution that brings buyers and sellers together (Ex: exchanges - set prices to buy and sell stock shares, free market - negotiate price with seller)

Determinants of Demand: Nonprice factors 4) Number of Buyers

As more consumers enter a market, demand increases Ex: as average lifespans rise, demand for pharmaceuticals increases

Determinants of Supply: Nonprice Factors 5) Number of Sellers

As more producers enter a market, supply increases (and vice versa) As more firms produce surfboards, supply increases Curve shifts to the right

Law of Demand

As price increases, quantity demanded falls As price decreases, quantity demanded rises *Holding all other relevant factors constant

Change in demand vs. change in quantity demanded

Change in quantity demand happens in response to price Change in demand - whole graph shifts to the right or the left due to change in expectations, taste and preferences, price of related goods, change in income, number of buyers Shifts of the supply curve - change in technology, taxes and subsidies, future expectations of prices, resources, number of sellers Moth infecting tomatoes - from latin america to europe Supply curve shifts left

Decrease in demand

Consumers buy less at every price level, (or they reduce the price they're willing to pay for a given quantity.) On the graph: the demand curve shifts inwards, down, and to the left.

Increase in demand

Consumers buy more at every price level, (or consumers are willing to pay more for each quantity.) On the graph: the demand curve shifts outwards, up, and to the right.

Which of the following would not shift the demand for orange juice? A) Consumer incomes rise B) Price of apple juice, a substitute, falls C) New research showing the benefits of orange juice D) Level of government subsidies to farmers rise E) An overall rise in the population

D) Level of government subsidies to farmers rise Shift in supply not demand

Inferior Goods

Demand decreases as incomes rise Ex: bus ticket, thrift shopping, generic products, fast food

What happens to demand for ipads if price of monthly data plans falls?

Demand goes up because demand for complementary products goes up

Normal Goods

Demand increases as incomes rise Ex: travel, luxury goods, eating out more, new cars instead of used

The popularity of Costa Rica as a travel destination increases. What happens to the prices and quantity of tourist facilities?

Demand increases because quantity supplied will increase due to change in price

Determinants of Demand: Nonprice factors 1) Tastes and Preferences

Demand will increase for products that come into fashion (and vice versa) Examples: - Different color or styles of clothes - Hot coffee vs. Iced (seasonal) - Video games/updates - Sports teams - if team wins championship, sell more merchandise - If there is a company scandal - VW or Wells Fargo

Determinants of Demand: Nonprice factors 3) Price of complements

Goods that are typically consumed together. If the price of a complement decreases, the demand for the original good increases (and vice versa) Ex: gas price increases are bad for auto sales **Sometimes can be bundled together like chips and dip, hot dogs and hot dog buns, iphones and cases, paper and ink

Change in Supply

Greater Quantity Supplied at the Same Price Willing to Sell Same Quantity at Lower Prices **Lower costs increase supply Smaller Quantity Supplied at the Same Price Higher Price Needed to Sell Same Quantity **Higher costs decrease supply

Important supply shifters: changes in opportunity costs

Higher (Opportunity) Costs Reduce Supply- Rising Wheat Prices Reduce Soybean Supply

Market Demand Curve

Horizontal summation of all individual demand curves

Market Supply Curve

Horizontal summation of all individual supply curves Ex: 10 home builders each build 100 houses when price equals $200,000. Then market supply = 1000

Both supply and demand curves shift

If demand and supply both increase, the equilibrium quantity rises, but the equilibrium price depends on the relative magnitude of the shifts.

Horizontal Summation

Market demand and supply curves are found by adding together how many units of the product will be purchased/supplied at each price

Price System**

Market economies use prices to allocate resources, goods, and services What are people willing to pay If you need to stand in line, also include "price of time"

Change in Demand

Occurs when one or more of the determinants of demand changes; it shifts the entire demand curve Whole curve goes inward or outward. **Not the same as change in quantity demanded

Market equilibrium

Occurs when quantity supplied equals quantity demanded Equilibrium price = the price at which this occurs Equilibrium quantity = the output at which this occurs

Determinants of Demand: Nonprice factors

Position of the demand curve is determined by price but there are also other factors that can shift the demand curve outwards or inwards Nonprice factors affect demand and are held constant when drawing a demand curve. They include: - Tastes and preferences - Income - Prices of related goods: substitutes and complements - Number of buyers - Expectations about future prices

Demand Curve

Relationship between product price and quantity ***Price determines quantity demanded Nobody wants to buy the product at 100$ but as the price goes down, more people are willing to buy the product When the price of a product is high, it will only be used for fewer and more unique (high value) products

Determinants of Supply: Nonprice Factors 2) Costs of Resources

Supply increases if the costs of resources used decreases (and vice versa) - If soybean prices decrease the supply of soymilk and tofu increases

Determinants of Supply: Nonprice Factors 1) Production Technology

Supply increases when technology improvements lower the cost of production

Why is the supply curve upward sloping?

The cost of producing a good is not equal across all suppliers. - At a low price, a good is produced and sold only by the lowest cost suppliers. - At a high price, a good is also produced and sold by higher cost suppliers. **because some have higher transportation costs or high production costs

Demand

The maximum amount of a product that buyers are willing to purchase over some time period at various prices (Ceteris Paribus)

Supply

The maximum amount of a product that sellers are willing and able to provide over some time period at various prices (ceteris paribus) Demand = negative relationship between quantity demanded and price Supply = positive relationship Must be in stock and available Willing to pay for product right that moment

Case Study: Electricity Generation

The variable operating cost of electric power generators is a key factor in determining which units a power system operates (or "dispatches") to meet the demand for electricity. Other things being equal, plants with the lowest variable operating costs are generally dispatched first, and plants with higher variable operating costs are brought on line sequentially as electricity demand increases.

Change in Quantity demanded

When price changes, there is movement along the curve

Surplus

When prices are too high

Shortage

When prices are too low

Consumers can afford more goods when prices are lower

When the price is high, people consume fewer of the product When gas prices were high, people tried to drive less and move closer to work and school

Change in Supply

Whole curve shifts right NOT the same as change in quantity supplied (movement along the curve)