Microeconomics Chapter 3

When there is a change in the economy

1. Determine if this event changes the supply or demand or both 2. How it affects them? Left, right shift, or movement along the line 3. Look for new equilibrium price and quantity price and quantity 4. Compare to old equilibrium point. Price is determined by the interaction of buyers and sellers. Neither group can dictate price in a competitive market (i.e. one with many buyers and sellers). However changes in supply and/or demand will affect the price and quantity traded.

What factors influence market demand?

1. Income of consumers 2. Prices of related goods 3. Tastes 4. Population and demographics 5. Expected future prices

Variables that shifts market supply

1. Prices of input 2. Technological change 3. Prices of substitutes in production 4. Number of firms in the market 5. Expected future prices

When the number of firms increases

1. Supply is affected 2. Increase in supply, shift to the right

Increase and decrease in demand

A change in something is something other than price that affects demand causes the entire demand curve to shift. A shift to the right is an increase in demand. A shift to the left is a decrease in demand. It must be a increase/decrease in all quantity demanded. Change in demand causes a shift in demand curve caused by something other than price.

Change in demand vs. change in quantity demanded

A change in the price of the product being examined causes a movement along the demand curve. This is a change in quantity demanded. Any other change affecting demand causes the entire demand curve to shift. This is a change in demand.

Supply curve

A curve that shows the relationship between the price of a product and the quantity of the product supplied

Demand curve

A curve that shows the relationship between the price of a product and the quantity pf a product demanded

Technological change

A firm may experience a positive or negative change in its ability to produce a given level of output with a given quantity of inputs. This is a technological change. Changes raises or lower firms' cost, hence their supply of the good. Examples: A new, more productive variety of wheat would increase the supply of wheat. Government restrictions on land use for agriculture might decrease the supply of wheat.

Inferior goods

A good for which the demand increases as income falls and decreases as income rises. Ex. Second-hand clothing, ramen noodles

Normal goods

A good for which the demand increases as income rises and decreases as income falls Ex. clothing, restaurant meals, vacations

Perfectly competitors market

A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market

Shortage

A situation in the quantity demanded is greater than the quantity supplied. Whenever the price is market is below the equilibrium there is a shortage. Shortage puts upward pressure on price.

Market Equlibrium

A situation in which quantity demanded equals quantity demanded equals quantity supplied. A market equilibrium with many buyers and sellers is a competitive market equilibrium. Only certain things in the market will make it move.

Surplus

A situation in which the quantity supplied is greater than the quantity demanded. Whenever the price is above the equilibrium price, quantity supplied is greater than quantity demanded. As a supplier price goes down, the quantity demanded goes up. Surplus puts downward pressure on price.

Demand schedule

A table that shows the relationship between the price of a product and the quantity of the product demanded.

Supply schedule

A table the shows the relationship between the price of a product and the quantity of the product supplied

Price is based on

An agreement between the demander and the supplier. Demanders alone and suppliers alone cannot determine the price an item.

Shifts of the Supply Curve

As the supply curve shifts, the quantity supplied will change, even if the price doesn't change. The quantity supplied changes at every possible price

Change in Expectations about Future Prices

Consumers decide which products to buy and when to buy them. (1) Future products are substitutes for current products (2) An expected increase in the price tomorrow increases demand today (3) An expected decrease in the price tomorrow decreases demand today. Ex. its Tuesday an they have a huge sale on Friday, demand today goes down but Friday it will go up

Demand schedule and quantiy

Every quantity is associated with a price. Consumer must be willing and able to purchase at a certain price. This line has ordered pairs. Demand curve has inverse relation, shows price of a product and quantity demanded, shows negative relations as long as everything else remains the same, consist of quantity demanded. Price on y, quantity demanded on x. Quantity demanded is a certain demand at a certain price. Quantity demanded is a point on the demand curve.

Complements

Goods and services that are used together Ex. Big Mac and McDonald's fries, Hot dogs and hot dog buns, Left shoes and right shoes.

Subsitutes

Goods and services that can be used for the same purpose Ex. Big Mac and Whopper, Ford F-150 and Dodge Ram, Jeans and Khakis

Tastes

If consumers' tastes change, they may buy more or less of the product. Preferences, if things are a big hit. Ex. If consumers become more concerned about eating healthily, they might decrease their demand for fast food.

Populations and demographics

Increases in the number of people buying something will increase the amount demanded. Ex. An increase in the elderly population increases the demand for medical care.

Changes in Prices of Inputs

Inputs are things used in the production of a good or service. Examples of inputs for smartphones: computer processor, plastic housing, labor. An increase in the price of an input decreases the profitability of selling the good, causing a decrease in supply. A decrease in the price of an input increases the profitability of selling the good, causing an increase in supply.

Shifts in demand and supply over time

It is likely that both demand and supply will change. For example, as new firms enter the market for smartphones and incomes increase, we expect the supply of smartphones will shift to the right and the demand for smartphones will shift to the right.

Prices of Substitutes and Number of Firms

Many firms can produce and sell more than one product. Example: An Illinois farmer can plant corn or soybeans rises, he will plant (supply) less corn. More firms in the market will result in more product available at a given price (greater supply). Fewer firms ->supply decreases. Different story if only one firm in market.

What two types of income goods are there

Normal goods and inferior goods

What affects supply and demand

Price and other factors. Demand is determined by the consumer. Price is the most important factor when buying. Determine if you want it or not.

Supply Shifting more than demand

Quantity rises, but equilibrium price falls

When the price of a product falls, two effects cause consumers to purchase of it:

Substitution effect and income effect

Quantity demanded

The amount of a good or service that a consumer is willing and able to purchase at a given price

Quantity supplied

The amount of a good or service that a firm is willing and able to supply at a given price

Substitution effect

The change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods that are substitutes. The product has become cheaper relative to other goods, so consumers substitute toward it.

Income effect

The change in the quantity demanded of a good that results from the effect of a change in the good's price on consumers' purchasing power. The consumer now has greater purchasing power, and elects to purchase more goods overall

Market demand

The demand by all the consumers of a given good or service

Ceteris paribus ("all else equal") condition

The requirement that when analyzing the relationship between two variables-such as price and quantity demanded-other variables must be held constant. Demand curve shows negative relationship between price and quantity demanded with ceteris paribus. Very few times does demand increase when the price increases. When the price of something goes up, they substitute it for something else substitute. When prices increase your purchasing power decreases (income effect)

Law of supply

The rule that, holding everything else constant, increases in price cause increases in the quantity supplied and decreases in price decreases in the quantity supplied. Implication: supply curves slope upward. As price increases, all businesses will increase their quantity supplied. Income and substitution effect are why demand curve goes down. Factors of production are what the item needs to be made and sold

Law of demand

The rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease.

Size of change determines

The size of the shift

Supply schedules and supply curves

They will only sell a few items at lower prices. They want to sell something at highest price. There is a positive relationship between price and quantity supplied. Won't sell something cost. Cost of production is minimum price for item.

Demand shifting more than supply

We can be sure the equilibrium quantity will rise, but the effect on equilibrium price is not clear. In most cases both the equilibrium supply and price is increase