Week 3
If the price is below the equilibrium level, then the quantity demanded will exceed the quantity supplied. This is known as: (3.3)
excess demand
complement good (3.4)
- goods that are often used together so that consumption of one good tends to enhance consumption of the other - when the price of one complement increases, the demand for the other complement decreases - when the price of one complement decreases, the demand for the other complement increases
shortage amount (3.3)
= qd-qs
Andy views beer and pizza as complements to one another. If the price of pizza decreases, economists would expect: (3.4)
Andy's demand for beer to increase.
What is the difference between the demand and the quantity demanded of a product, say milk? Explain in words and show the difference on a graph with a demand curve for milk. (3.4)
Demand describes consumers' willingness to buy a good at any price. Demand is shown by the position of a demand curve, in other words, how far away from the origin it is. Quantity demanded refers to how much will be purchased at a single, specific price, that is, at one point on the demand curve.
change in demand vs change in quantity demanded (3.4)
It is important to distinguish between a change in demand and a change in the quantity demanded. A change in demand is a change in the ENTIRE demand relation. This means changing, moving, and shifting the entire demand curve . The entire set of prices and quantities is changing. In other words, this is a shift of the demand curve to the left or to the right . A change in demand is caused by a change in the five demand determinants. A change in quantity demanded is a change from one price-quantity pair on an existing demand curve to a new price-quantity pair on the SAME demand curve. In other words, this is a movement along the demand curve . A change in quantity demanded is caused by a change in price .
A severe freeze has once again damaged the Florida orange crop. The impact on the market for orange juice will be a leftward shift of: (3.4)
the supply curve
key ideas (3.4)
- Any given demand or supply curve is based on the ceteris paribus assumption that all else is held equal. - The direction of the arrows indicates whether the demand curve shifts represent an increase in demand or a decrease in demand. - Factors that change demand include change in income, tastes and preferences, the composition or size of the population, the prices of related goods, and even expectations. - A change in the price of a good or service causes a movement along a specific demand curve, and it typically leads to some change in the quantity demanded, but it does not shift the demand curve. - Changes in the cost of inputs, natural disasters, new technologies, and the impact of government decisions all affect the cost of production, shifting the entire supply curve left or right. - A change in price of a good or service typically causes a change in quantity supplied or a movement along the supply curve for that specific good or service, but it does not cause the supply curve itself to shift.
key ideas (3.3)
- Because the graphs for demand and supply curves both have price on the vertical axis and quantity on the horizontal axis, the demand curve and supply curve for a particular good or service can appear on the same graph. - The point where the supply curve (S) and the demand curve (D) cross is called the equilibrium. - If a market is not at equilibrium, then economic pressures arise to move the market toward the equilibrium price and the equilibrium quantity.
key ideas (3.1)
- Demand is the amount of some good or service consumers are willing and able to purchase at each price. - The total number of units that consumers would purchase at that price is called the quantity demanded. - The law of demand states that, keeping all other variables that affect demand constant (ceteris paribus), if price increases, then the quantity demanded decreases. If the price decreases, then the quantity demanded increases. - The demand curve demonstrates the inverse relationship between price and quantity demanded.
figure 1 (3.2)
- Refer to figure 1. - Because price and quantity supplied are directly related, the supply curve graphs as an upward-sloping curve (as seen in Figure 1 ). Other things equal, producers will offer more of a product for sale as its price rises and less of the product for sale as its price falls.
key ideas (3.2)
- Supply is the amount of some good or service a producer is willing to supply at each price. - The law of supply states that, assuming all other variables that affect supply are held constant (ceteris paribus), if prices increase, then the supply increases. If prices decrease, then the supply will decrease. - The supply curve demonstrates the direct relationship between price and quantity.
key ideas (3.5)
- The equilibrium price and quantity may be determined via the four-step process: - The first step is to draw a demand and supply model before the economic change took place. - Secondly, determine whether the economic change you are analyzing impacts demand or supply. - Next, determine whether the effect on demand or supply causes the curve to shift right or left, and draw the new demand or supply curve on the graph. - Lastly, identify the new equilibrium, and then compare the original equilibrium price and quantity to the new equilibrium price and quantity.
inferior good (3.4)
- a good in which the quantity demanded falls as income rises, and in which quantity demanded rises and income falls
normal good (3.4)
- a good in which the quantity demanded rises as income rises, and in which quantity demanded falls as income falls
substitute good (3.4)
- a good that can replace another to some extent, so that greater consumption of one good can mean less of the other - if the price of one good increases, the demand for its substitute increases - if the price of one good decreases, the demand for the other substitute decreases
law of diminishing marginal utility (3.1)
- as we consume more of a good or service, the utility we get from additional units of the good or service tends to become smaller than what we received from earlier units - for example, the 8th cup of coffee may be less enjoyable than the 1st, so the price you are willing to pay for it would be less
factors that increase supply (3.4)
- favorable natural conditions for production - a fall in input prices - improved technology - lower product taxes/less costly regulations
factors that decrease supply (3.4)
- poor natural conditions for production - a rise input prices - a decline in technology (not common) - higher product taxes/more costly regulations
figure 1 (3.1)
- refer to figure 1 - The demand curve (shown in Figure 1 ) illustrates the inverse relationship between price and quantity. The downward slope (put your Ds together) indicates a lower quantity (horizontal axis) at a higher price (vertical axis), and a higher quantity at a lower price, reflecting the law of demand.
figure 3 (3.4)
- refer to figure 3 - Increased demand means that at every given price, the quantity demanded is higher, so that the demand curve shifts to the right from D0 to D1. Decreased demand means that at every given price, the quantity demanded is lower, so that the demand curve shifts to the left from D0 to D2.
figure 1 (3.3)
- review figure 1
factors that increase demand (3.4)
- taste shift to greater popularity - population likely to buy rises - income rises (for a normal good) - price of substitute rises - price of complement falls - future expectations encourage buying
factors that decrease demand (3.4)
- taste shift to lesser popularity - population likely to buy drops - income drops (for a normal good) - price of substitute falls - price of complement rises - future expectations discourage buying
equilibrium price (3.3)
- the price where quantity demanded is equal to quantity supplied
demand (3.1)
- the relationship between price and the quantity demanded of a certain good or service - to be part of the demand for a good, consumers have to be willing and able to purchase the good - when creating demand, we are assuming that the only factor that causes consumers to buy more or less (quantity) is the price of the good - market demand is created by summing the individuals' demand curves
supply (3.2)
- the relationship between price and the quantity supplied of a certain good or service - to be part of the supply of a good, producers have to be willing and able to produce the good - producers are willing to produce and sell more of their product at a high price than at a low price - when creating supply, we are assuming that the only factor that causes firms to produce more or less is the price of the good - given product costs, a higher price means greater profits and thus an incentive to increase the quantity supplied
setting price (3.4)
= desired profit + cost of production - increasing costs leads to an increase in price - also leads to the supply curve shifting up to a new level
surplus amount (3.3)
= qs - qd
change in supply vs change in quantity supplied (3.4)
A change in supply is a change in the ENTIRE supply relation. This means changing, moving, and shifting the entire supply curve . The entire set of prices and quantities is changing. In other words, this is a left or right shift of the supply curve. A change in supply is caused by a change in the five supply determinants. A change in quantity supplied is a change from one price-quantity pair on an existing supply curve to a new price-quantity pair on the SAME supply curve. In other words, this is a movement along the supply curve . A change in quantity supplied is caused by a change in price .
What does a downward-sloping demand curve mean about how buyers in a market will react to a higher price? (3.1)
A downward sloping demand curve means that buyers will demand less of a good the higher the price becomes.
figure 11 (3.4)
Decreased supply means that at every given price, the quantity supplied is lower, so that the supply curve shifts to the left, from S0 to S1. Increased supply means that at every given price, the quantity supplied is higher, so that the supply curve shifts to the right, from S0 to S2.
point (3.4)
If a graph, any graph in economics shifts to the left, it can be a sign of recession or depression. When drawing a graph shifting left, you can use the color red to show the shift. If a graph shifts to the right, it is a sign of economic growth. When drawing a graph shifting to the right, you can use the color green to demonstrate the shift.
point (3.4)
If the price of another good that the producer could produce with the same resources rises, the supply decreases for the product the producers are currently producing. For example, if the price of a basketball increases, they will produce less soccer balls (supply curve for soccer balls shifts left). If the price of another good that the producer could produce with the same resources falls, the supply increases for the product the producers are currently producing.
ceteris paribus (3.1)
In economics, we have a bit of Latin to remember. Who knew? 🙂 This is ceteris paribus. Ceteris paribus means other things equal. As we are comparing two things (we economists like to keep it simple), everything else in that moment is as is. It does not factor in to our comparison. For example, looking at supply and demand, we compare price versus quantity, ceteris paribus.
Let's think about the market for air travel. From August 2014 to January to 2015, the price of jet fuel increased roughly 47%. Using the four-step analysis, how do you think this fuel price increase affected the equilibrium price and quantity of air travel? (3.5)
Step 1: Draw the graph with the initial supply and demand curves. Label the initial equilibrium price and quantity. Step 2: Did the economic event affect supply or demand? Jet fuel is a cost of producing air travel, so an increase in price affects supply. Step 3: An increase in the price of jet fuel caused an increase in the cost of air travel. We show this as an upward or leftward shift in supply. Step 4: A leftward shift in supply causes a movement up the demand curve, raising the equilibrium price of air travel and lowering the equilibrium quantity.
What is the difference between the supply and the quantity supplied of a product, say milk? Explain in words and show the difference on a graph with the supply curve for milk. (3.4)
Supply describes producers' willingness to sell at any price. Supply is shown by the position of a supply curve, in other words, how far away from the origin it is. Quantity supplied refers to how much will be sold at a single, specific price, that is, at one point on the supply curve.
income effect (3.1)
The income effect states that a lower price increases the purchasing power of money income, enabling the consumer to buy more at a lower price (or less at a higher price) without having to reduce consumption of other goods.
Will supply curves have the same shape in all markets? If not, how will they differ? (3.2)
The shape of supply curves will differ based on how easy it is to vary the level of supply in response to a price change. For example, a natural resource of which there is a finite amount may have a very steep supply curve, because of the difficulty in increasing production.
substitution effect (3.1)
The substitution effect says a lower price gives an incentive to substitute the lower-priced good for the now relatively higher-priced goods. If the price of tea drops significantly below the price of your beloved coffee, you could substitute the tea for your morning coffee.
Review the following figure. Suppose the government decided that, since gasoline is a necessity, its price should be legally capped at $1.30 per gallon. What do you anticipate would be the outcome in the gasoline market? (3.3)
There would be a shortage of gasoline. At such a low price, consumers would be very eager to buy, but producers would see limited profit opportunities. The quantity demanded would therefore exceed the quantity supplied by the market.
After widespread press reports about the dangers of contracting "mad cow disease" by consuming beef from Canada, the likely economic effect on the U.S. demand curve for beef from Canada is: (3.4)
a shift of the demand curve for beef to the left
The term "ceteris paribus" means that: (3.1)
all variables except those specified are constant
excess surplus (3.3)
at the existing price, quantity supplied exceeds the quantity demanded; also called a surplus
excess demand (3.3)
at the existing price, the quantity demanded exceeds the quantity supplied; also called a shortage
shortage (3.3)
at the existing price, the quantity demanded exceeds the quantity supplied; also called excess demand
Which of the following would reduce the supply of microcomputers? (3.4)
higher wage rates for the workers that assemble the computers
The demand schedule for a good: (3.1)
indicates the quantities that will be purchased at alternative market prices