Chapter 3

Increases or decreases in supply lead to....

shifts of the supply curve

Competitive Market

A market in which there are many buyers and sellers of the same good or service, none of whom can influence the price at which the good or service is sold. There are many buyers and sellers of the same good or service. No individual's actions have a noticeable effect on the price at which the good or service is sold.

Inferior goods

A rise in income decreases the demand for a good.

Normal goods

A rise in income increases the demand for a good

Complements

A rise in the price of one good leads to a decrease in the demand for the other good. Goods that are consumed together Example cars and gasoline, cappuccinos and cookies When the price of one good rises, the demand for its complement decreases, shifting the demand curve for the complement to the left.

Overview

An increase in demand increases both the equilibrium price and the equilibrium quantity A decrease in demand decreases both the equilibrium price and the equilibrium quantity.

How does the market respond to a change in demand?

An increase in demand leads to a rise in both the equilibrium price and equilibrium quantity. A decrease in demand leads to a fall in both the equilibrium price and the equilibrium quantity.

Overview pt 2

An increase in supply decreases the equilibrium price and increases the equilibrium quantity. A decrease in supply increases the equilibrium price and decreases the equilibrium quantity.

What happens when the number of producers affect the supply curve?

We look at the individual supply curve

What happens when the supply curve shifts?

When the supply of a good or service decreases, the equilibrium price of the good or service will increase and the equilibrium quantity of the good or service falls. Example cotton getting wet, supply decrease and prices rise.

Market clearing price

Is is also known as the equilibrium price. It is the price that clears the market by ensuring that every buyer willing to pay that price finds a seller willing to sell at that price and vice versa.

What happens to the goods or services when there is a change in income?

Normal good and inferior good

Market equilibrium

Occurs at point where the supply curve and demand curve intersect.

Shift of the demand curve

A change in the quantity demanded at any given price, represented by the change of the original demand curve to a new position. Price remains the same just moves quantity.

How does the market respond to a change in supply?

An increase in supply leads to a fall in the equilibrium price and a rise in the equilibrium quantity. A decrease in supply leads to an increase in the equilibrium price and a decrease in the equilibrium quantity.

What are the five principle factors that shift the demand curve for a good or service?

Changes in the prices of related goods or services Changes in income Changes in tastes Changes in expectations Changes in the number of consumers

Demand vs Quantity Demand

Demand: The combo of prices and quantities demanded. Change in a factor other than Price. The other factors are taste, expectations, numbers of consumers preferences, income, and etc Quantity demanded: A particular point along the demand curve. Price IS a factor. A result of a change in price of that good alone.

What are the changes in the prices of related goods or services?

Substitutes and complements.

Quantity demanded

The actual amount of a good or service consumers are willing to buy at some specific price. Example: The higher the price, the fewer will be sold.

Quantity Supplied

The actual amount of a good or service people are willing to sell at some specific price.

Movement along the demand curve

The change in the quantity demanded of a good arising from a change in the good's price. Changes in price price and location.

What is the easiest way to determine the equilibrium price and the quantity in a market?

The easiest way to determine the equilibrium price and quantity in a market is by putting the supply curve and demand curve on the same diagram. Since the supply curve shows the quantity supplied at any given price and the demand curve shows the quanity demanded at any given price, the price at which the two curves cross is the equilibrium price. Price at which quantity supplied equals quantity demanded.

Market supply curve

The horizontal sum of the individual supply curves of all producers.

What happens to an increase in supply?

The supply is a rightward shift, the quantity supplied rises for any given price.

What happens to changes in the number of consumers?

There will be an individual demand curve.

Supply curve

Shows the relationship between quantity supplied and price.

What are the five key elements of supply and demand model?

.The demand curve .The supply curve .The set of factors that cause the demand curve to shift and the set of factors that cause the supply curve to shift .The market equilibrium, which includes the equilibrium price and equilibrium quantity .The way the market equilibrium changes when the supply curve or demand shifts

What are the five factors that economists believe shift the supply curve for a good or service?

1. Changes in input prices (oil prices are high airplanes cut back on flights so a fall in price of an input make the production of the final good less costly for sellers). 2.Changes in the prices of related goods or services 3.Changes in technology 4.Changes in expectations 5.Changes in the number of producers

Movement along the supply curve

A change in the quantity supplied of a good arising from the change in the good's price.

Shift of the supply curve

A change in the quantity supplied of a good or service at any given price. It is represented by the change of the original supply curve to a new position,denoted by a new supply curve.

When is a competitive market in equilibrium?

A competitive market is in equilibrium when price has moved to a level at which the quantity of a good or service demanded equals the quantity of that good or service supplied. The price at which this takes the place is the equilibrium price aka the market clearing price. The quantity of the good or service bought and sold at that price is the equilibrium quantity.

What happens to a decrease in supply?

A decrease in supply is a leftward shift, the quantity supplied falls for any given price.

Inputs

A good or service that is used to produce another good or service.

Demand curve

A graphical representation of the demand schedule. It shows the relationship between quantity demanded and price.

Law of demand

A higher price for a good or service, other things equal, leads people to demand a smaller quantity of that good or service. Basically a higher price reduces the quantity demanded.

Supply and demand model

A model of how a competitive market behaves.

Substitutes

A rise in the price of one good will lead to an increase in the demand for the other good Example: Jeans and khakis, muffins and donuts, train rides and air flights Substitutes are usually good that serve a similar function

Why do all sales and purchases in a market take place at the same price?

All sellers receive and all buyers pay approximately the same price. So to have same market price.

What happens when the demand curve shifts?

Cotton and polyester are substitutes: if the price of polyester rises, the demand for cotton rises and vice versa for decrease. But how does the price of polyester affect the market equilibrium for cotton? Rise in the price of polyester increases demand for cotton. When the demand for a good or service increases, the equlibrium price and the equilibrium quantity of the good or service both rise. Both price and quantity supplied increases. An increase in demand causes rightward shift. There is a shortage because the quantity demanded exceeds the quantity supplied. When demand for a good or service increases the equilibrium price and equilibrium quantity of the good or service both rise. Vice vera.

individual demand cure

Illustrates the relationship between quantity demand and price for an individual consumer.

Individual supply curve

Illustrates the relationship between quantity supplied and price for an individual.

What is market demand curve?

It is when you add up the horizontal sum of the individual demand curve of all consumers.

Supply Schedule

Shows how much of a good or service would be supplied at different prices. So as prices increases, the quantity supplied rises.. Usually upward sloping

Using Equilibrium to describe markets

Market tends to have a single price, the equilibrium price. If market price is above equilibrium level, the surplus leads buyers and sellers to take actions that lower price. If market price is below equilibrium level, the shortage leads buyers and sellers to take actions that raises the price. So the market price always move toward the equilibrium price, the price at which there is neither surplus or shortage.

Overview pt 3

Shift of demand curve and supply curve same time in opposite directions, the change in equilibrium price is predictable but the change in equilibrium quantity is NOT. When the shift is the same time in same directions, the change in equilibrium quantity is predictable but the change in equilibrium price is NOT.

Demand Schedule

Shows how much of a good or service consumers will want to buy at different prices

What happens when there are simultaneous shifts of the demand and supply curves?

The curves that shifts the greater distance has a greater effect on the change in equilibrium price and quantity.

Why does the market price fall if it is above the equilibrium price?

The market falls due to a surplus which is when the quantity supplied exceeds the quantity demanded. Excess supply. Have to offer a lower price in order get more buyers. The result of this price cutting will be to push the prevailing prices down until it reaches the equilibrium price. So the price of a good will fall whenever there is surplus.

Why does the market price rise if it is below the equilibrium price?

The market price rises due to a shortage of a good or service when the quantity demanded exceeds the quantity supplied. The shortage will push the price up until it reaches the equilibrium price.

Equilibrium price

The prices that matches the quantity supplied and the quantity demanded.

Equilibrium quantity

The quantity bought and sold at that price.

What happens when the demand and supply curve shift at the same time? Assuming same directions

When both demand and supply increase, the equilibrium quantity rises but the change in equilibrium price is ambiguous (debatable) When both demand and supply decrease, the equilibrium quantity decreases but the change in equilibrium price is ambiguous.

What happens when the demand and supply curve shift at the same time? Assuming opposite directions

When demand increases and supply decreases, the equilibrium price will rise but the quantity is ambiguous(debatable) When demand decreases and supply increase, the equilibrium price falls but the change in the equilibrium is ambiguous (debatable)