Macroeconomics Chapter 3

How does altering the price effect demand and supply?

(All other things being equal) Lowering the price will create excess demand, where the quantity demanded exceeds the quantity supplied. Increasing the price will lead to excess supply.

Demand Curve

A GRAPH showing the relationship between quantity demanded and the price of the product. (price is on y-axis, quantity is on x-axis)

Demand Schedule

A TABLE showing the relationship between quantity demanded and the price of the product (per item)

How do changes in quantity demanded often work to offset changes in demand?

A change in demand will often alter the price of the product. This will affect the price, which may inturn alter the amount of people interested in it.

What is the difference between change in demand and change in quantity demanded in terms of a demand curve?

A change in demand will shift the whole curve left or right. A change in quantity demanded represents a movement ALONG the demand curve itself (ie it involves two dimensions of change) after the change in demand.

Perfectly competitive market

A market in which no buyers and sellers has an appreciable influence on the market price.

Disequilibrium Price

A price at which the quantity demanded does not equal the quality supplied.

Relative Price

A ratio of two absolute prices that shows how expensive goods are in relation to each other.

Disequilibrium

A state in which there is excess demand or supply in the market.

How does excess supply cause downward pressure on price?

A surplus is pointless for sellers, so they will lower their price to get rid of the surplus. Buyers, witnessing the excess of a product, will not be willing to pay as much.

Supply Schedule

A table showing the relationship between quantity supplied and the price of a commodity (other things being equal).

Inputs

All things that a firm uses to produce outputs (products).

Substitutes in production

Alternative products that a producer can make at the expense of another product.

What does the negative slope of a demand curve indicate?

As quantity demanded increases, the price consumers are willing to pay falls.

How does a decrease in demand affect equilibrium price and quantity exchanged? Why?

Both decrease (Decrease in demand creates excess at initial price, and sellers bid price down. This decrease in price causes less to be supplied since it is less profitable. The net effect is that less is exchanged at a lower price)

How does an increase in demand effect equilibrium price and quantity exchanged? Why?

Both increase. (Increase in demand creates shortage at initial equilibrium price, and unsatisfied buyers bid up. This rise causes larger quantity to be supplied. The net effect is that more is exchanged at a higher price)

What is the difference between a change in supply and change in quality supplied in terms of the supply curve?

Change in supply describes a shift of the whole curve. Change in quality supplied refers to movement from one point on the curve to another.

What does the demand curve shifting to the right represent?

Consumers being willing to pay more per-item for the same amount of goods.

What does the demand curve shifting to the left represent?

Consumers wanting to pay less per-item for the same amount of goods.

What does the Law of Demand Stipulate?

Demand by consumers is in negative proportion to the price demanded by sellers (in other words, demand goes up when price goes down and down when price goes up)

How does quantity demanded relate to demand?

Demand refers to the whole relationship between quantity demanded and price. (A single point on a demand curve represents the price unique to a certain quantity demanded)

Inferior Goods

Goods that are demanded less when income increases.

Normal Goods

Goods that are demanded more when income increases.

Substites in consumption

Goods that can be used in place of another goods to satisfy similar desires.

Complements in consumption

Goods that tend to be consumed together.

What series of events explains demand going up when price goes down?

If the price goes down, the product becomes a cheaper way of satisfying a desire. Households will thus demand more of it and spend less money on products that are expensive relative to it.

What series of events explains demand going down when price goes up?

If the price goes up, the product becomes a more expensive way of satisfying a desire. Households will (on average) demand less of it and spend more money on products that are cheap relative to it.

What basic hypothesis correlates the price of the product with quantity supplied?

In increase in product price (irrespective of all other things, such as the cost of making product) will result in more of that product supplied.

What are the conditions in which the demand and supply model works?

Large number of consumers with low market power, large number of producers with low market power, products must be identical or homogeneous.

Does quantity demanded always translate to quantity purchased?

No (the supply may be inefficient to keep up with all the demands of potential consumers -- in this case we say that quantity demanded exceeds quantity bought/exchanged)

What are the variables that effect demand?

Price, Consumers' income, prices of other products, tastes, population, future expectations (about all other factors).

What are the factors that effect quantity supplied?

Procuct Price, Price of inputs, technology, government taxes or subsidies, prices of other products, number of suppliers.

Complements in production

Products that a producer makes in conjunction with another product.

How does excess demand cause upward pressure on price?

Purchasers, seeing that there is not enough for all of them, will compete and be willing to pay more to 'cut others out' of getting the product. Sellers will see the increased desperation for a product and capitalize by raising price as much as possible.

What equation represents a simplified, linear demand curve?

QD = a - bp (QD = quantity demanded, p = price, a,b = positive constants)

What equatin represents a simplified, linear supply curve?

QS = c + dp (QS = quantity supplied, p = price, c,d = positive constants)

How does a decrease in supply affect equilibrium price and quantity exchanged? Why?

Quantity exchanged decreases, price increases. (Decrease in supply creates buyers to bid up price. Rise in price reduces quantity demanded, new equilibrium has lower quantity sold at higher price.)

How does an increase in supply affect equilibrium price and quantity exchanged? Why?

Quantity exchanged increases, price drops. (Increase in supply creates surplus at equilibrium price, and sellers bid down. Drop in price increses the quantity demanded, and new equilibrium is at higher quantity sold for lower price)

Which price is relevant in supply and demand models- relative or absolute?

Relative price is what matters. Absolute price means ultimately very little in a world where all things are constantly increasing or decreasing in value.

Absolute Price/Money Price

The amount of money that must be spent to acquire a unit or product.

Quantity Supplied

The amount of some good or service that producers want to OFFER to sell in some time period.

Comparative statistics

The derivation of predictions by analyzing the effect of change of an exogenous variable on an equilibrium.

Ceteris parabis effect of a variable?

The effect a variable will have, 'all other things being equal' (ie the theoretical effect that a change will have if it is presented without any others)

Supply

The entire relationship between quantity supplied and the price of the product.

Supply Curve

The graphical representation of the relationship between quantity supplied and the price of a commodity (other things being equal).

How do the demand and supply curves determine the price of an item?

The intersection point of the demand and supply curves indicates the price point at which the quality demanded equals the quality supplied.

What does a single point on a supply curve represent?

The quantity supplied at a particular price for a certain per-item cost.

Demand

The relationship between the quantity demanded of a product and the price of the product.

Quantity Demanded

The total amount of any particular good or services that consumers WANT to purchase AT A SPECIFIC TIME PERIOD