Econ c4
When quantity supplied equals quantity demanded, prices______.
have no tendency to change; this is equilibrium
When the price is $5 each
. At $5, price is at its equilibrium: Quantity supplied equals quantity demanded. Suppliers offer to sell five and consumers want to buy five, so there's no pressure on price to rise or fall. Price will tend to remain where it is (point E in Figure 4-8). Notice that the equilibrium price is where the supply and demand curves intersect.
what 2 phenomena is the law of demand based on
1. At lower prices, existing demanders buy more. 2. At lower prices, new demanders (some all-or-nothing demanders like Carmen) enter the market
A market demand (supply) curve is __________.
The horizontal sum of all individual demand (supply) curves. (LO4-1, LO4-2)
Do we see such shifts in the supply curve often?
Yes. A good example is computers. For the past 30 years, technological changes have continually shifted the supply curve for computers out to the right.
When the supply curve shifts to the right (left), equilibrium price _______, and equilibrium quantity
declines (rises) rises (falls) (LO4-3)
Market supply
derived from individual supply curves in precisely the same way that the market demand curve was.
The laws of supply and demand hold true because
individuals can substitute
In the real world, you must add political and social forces to the supply/demand model. When you do, equilibrium ______
is likely not going to be where quantity demanded equals quantity supplied.
When quantity demanded is greater than quantity supplied, prices _____. When quantity supplied is greater than quantity demanded, prices _____.
tend to rise: tend to fall.
important shift factors of demand
1. Society's income. 2. The prices of other goods. 3. Tastes. 4. Expectations. 5. Taxes and subsidies.
Factors that affect supply and demand other than price are called _____. These of DEMAND include-_______. These of SUPPLY includ_____.
Shift factors; income, prices of other goods, tastes, expectations, and taxes on and subsidies to consumers y include the price of inputs, technology, expectations, and taxes on and subsidies to producers
When the demand curve shifts to the right (left), equilibrium price ________, and equilibrium quantity________.
rises (declines) rises (falls). (LO4-3)
The law of supply states that
quantity supplied rises as price rises, other things constant.
Ex) what will happen to your supply curve in these cases?
(1) You suddenly decide that you absolutely need a new car. (2) You win a million dollars in the lottery. And finally, (3) the wage you earn doubles. answers: Shift out to the right, shift in to the left, and no change—you've got it down.
Law of Demand
- Quantity demanded rises as price falls, other things constant. Or alternatively: - Quantity demanded falls as price rises, other things constant. This law is fundamental to the invisible hand's ability to coordinate individuals' desires; as prices change, people change how much they're willing to buy - If the price of something goes up, people will tend to buy less of it and buy something else instead. They will substitute other goods for goods whose relative price has gone up. If the price of Netflix falls but the price of more cable channels stays the same, you're likely to drop some cable channels and subscribe to Netflix.
Central element to understanding supply and demand
- When quantity demanded is greater than quantity supplied, prices tend to rise. - When quantity supplied is greater than quantity demanded, prices tend to fall Two other things to note about supply and demand are (1) the greater the difference between quantity supplied and quantity demanded, the more pressure there is for prices to rise or fall, and (2) when quantity demanded equals quantity supplied, the market is in equilibrium
examples of S & D
- Why are bacon and oranges so expensive this winter? Supply and demand. - Why are interest rates falling? Supply and demand. - Why can't I find decent wool socks anymore? Supply and demand
What equilibrium isn't
1. equilibrium isn't a state of the world. It's a characteristic of the model—the framework you use to look at the world 2. equilibrium isn't inherently good or bad. It's simply a state in which dynamic pressures offset each other. Some equilibria are good—a market in competitive equilibrium is one in which people can buy the goods they really want at the best possible price. Other equilibria are awful.
movement along a demand curve VS shift in demand (81)
A change in price changes the quantity demanded. It refers to a movement along a demand curve—the graphical representation of the effect of a change in price on the quantity demanded. A change in anything other than price that affects demand changes the entire demand curve. A shift factor of demand causes a shift in demand, the graphical representation of the effect of anything other than price on demand.
Fallacy of composition
As soon as one starts analyzing goods that are a large percentage of the entire economy, the other-things-constant assumption is likely not to hold true. The reason is found in the fallacy of composition—the false assumption that what is true for a part will also be true for the whole (One final comment) The fact that supply and demand may be interdependent does not mean that you can't use supply/demand analysis; it simply means that you must modify its results with the interdependency that, if you've done the analysis correctly, you've kept in the back of your head. U
Movement along the supply curve VS Shift in supply
Changes in price cause changes in quantity supplied; such changes are represented by a movement along a supply curve—the graphical representation of the effect of a change in price on the quantity supplied. If the amount supplied is affected by anything other than price, that is, by a shift factor of supply, there will be a shift in supply—the graphical representation of the effect of a change in a factor other than price on supply.
Demand VS Quantity Demanded
Demand: - refers to a schedule of quantities of a good that will be bought per unit of time at various prices, other things constant. - The term demand refers to the entire demand curve. Demand tells us how much will be bought at various prices Quantity demanded: - refers to a specific amount that will be demanded per unit of time at a specific price, other things constant - Quantity demanded tells us how much will be bought at a specific price; it refers to a point on a demand curve, such as point A in Figure 4-1
demand
People want lots of things; they "demand" much less than they want because demand means a willingness and ability to pay. Unless you are willing and able to pay for it, you may want it, but you don't demand it - ex) I want a Maserati but I cannot pay for it, therefore it is a want and not a demand.
Law of ___________ examples
People's tendencies to change prices exist as long as quantity supplied and quantity demanded differ. But the change in price brings the laws of supply and demand into play. As price falls, quantity supplied decreases as some suppliers leave the business (the law of supply). And as some people who originally weren't really interested in buying the good think, "Well, at this low price, maybe I do want to buy," quantity demanded increases (the law of demand). Similarly, when price rises, quantity supplied will increase (the law of supply) and quantity demanded will decrease (the law of demand). If, however, quantity supplied and quantity demanded are equal, price will stay the same because no one will have an incentive to change.
Shift in supply factor
Remember, as was the case with demand, a shift factor of supply is anything other than its price that affects supply. It shifts the entire supply curve. A change in price causes a movement along the supply curve
Excess demand
SHORTAGE quantity demanded is greater than quantity supplied. There are more consumers who want the good than there are suppliers selling the good - They'll likely call long-lost friends who just happen to be sellers of that good and tell them it's good to talk to them and, by the way, don't they want to sell that . . . ? - Suppliers will be rather pleased that so many of their old friends have remembered them, but they'll also likely see the connection between excess demand and their friends' thoughtfulness
excess supply
SURPLUS quantity supplied is greater than quantity demanded, and some suppliers won't be able to sell all their goods. - because all suppliers with excess goods will be thinking the same thing, the price in the market will fall. - As that happens, consumers will increase their quantity demanded. So the movement toward equilibrium caused by excess supply is on both the supply and demand sides.
When the price is $3 each
Say price is $3. The situation is now reversed. Quantity supplied is three and quantity demanded is seven. Excess demand is four. Now it's consumers who can't get what they want and suppliers who are in the strong bargaining position. The pressures will be on price to rise in the direction of the up arrows in Figure 4-8.
Supply VS Quantity Supplied
Supply: refers to a schedule of quantities a seller is willing to sell per unit of time at various prices, other things constant. - In graphical terms, supply refers to the entire supply curve because a supply curve tells us how much will be offered for sale at various prices. " Quantity supplied: refers to a specific amount that will be supplied at a specific price. - "Quantity supplied" refers to a point on a supply curve,
the Law of supply
There's a law of supply that corresponds to the law of demand. The law of supply states: - Quantity supplied rises as price rises, other things constant. Or alternatively: - Quantity supplied falls as price falls, other things constant. 1) The law of supply is based on a firm's ability to switch from producing one good to another, that is, to substitute. When the price of a good a person or firm supplies rises, individuals and firms can rearrange their activities in order to supply more of that good to the market. - For example, if the price of corn rises and the price of soybeans has not changed, farmers will grow less soybeans and more corn, other things constant. 2. Assuming firms' costs are constant, a higher price means higher profits (the difference between a firm's revenues and its costs). The expectation of those higher profits leads it to increase output as price rises, which is what the law of supply states.
The law of demand states that
quantity demanded rises as price falls, other things constant. (LO4-1)
When the price is $7 each
When price is $7, quantity supplied is seven and quantity demanded is only three. Excess supply is four. Individual consumers can get all they want, but most suppliers can't sell all they wish; they'll be stuck with movies that they'd like to rent. Suppliers will tend to offer their goods at a lower price and demanders, who see plenty of suppliers out there, will bargain harder for an even lower price. Both these forces will push the price as indicated by the down arrows in Figure 4-8. (91)
Equilibrium
When you have a market in which neither suppliers nor consumers collude and in which prices are free to move up and down, the forces of supply and demand interact to arrive at an equilibrium. The concept of equilibrium comes from physics—classical mechanics. Def: a concept in which opposing dynamic forces cancel each other out.
A change in quantity demanded (supplied) is a_____. A change in demand (supply) is a
a movement along the demand (supply) curve shift of the entire demand (supply) curve
Supply
supply is the mirror image of demand. Individuals control the factors of production—inputs, or resources, necessary to produce goods. Individuals' supply of these factors to the market mirrors other individuals' demand for those factors. the analysis of the supply of produced goods has two parts: 1. an analysis of the supply of factors of production to households and to firms and 2. an analysis of the process by which firms transform those factors of production into usable goods and services.
Equilibrium quantity
the amount bought and sold at the equilibrium price. Equilibrium price is the price toward which the invisible hand drives the market. At the equilibrium price, quantity demanded equals quantity supplied
In macro, small side effects that can be assumed away in micro are multiplied enormously and can significantly change the results. To ignore them is to fall into
the fallacy of composition
Demand curve (79)
the graphic representation of the relationship between price and quantity demanded As you can see, the demand curve slopes downward. That's because of the law of demand: As the price goes up, the quantity demanded goes down, other things constant. In other words, price and quantity demanded are inversely related - But what does "other things constant" mean? Say that over two years, both the price of cars and the number of cars purchased rise. That seems to violate the law of demand, since the number of cars purchased should have fallen in response to the rise in price. Looking at the data more closely, however, we see that individuals' income has also increased. Other things didn't remain the same
Supply curve
the graphical representation of the relationship between price and quantity supplied - The supply curve represents the set of minimum prices an individual seller will accept for various quantities of a good. The market's invisible hand stops suppliers from charging more than the market price - Notice how the supply curve slopes upward to the right. That upward slope captures the law of supply. It tells us that the quantity supplied varies directly—in the same direction—with the price
market demand curve
the horizontal sum of all individual demand curves. Firms don't care whether individual A or individual B buys their goods; they only care that someone buys their goods.
market supply curve
the horizontal sum of all individual supply curves. (page 88)
Prices
tool by which the market coordinates individuals' desires and limits how much people demand. When goods become scarce, the market reduces the quantity people demand; as their prices go up, people buy fewer goods - The invisible hand (the price mechanism) sees to it that what people demand (do what's necessary to get) matches what's available.